It’s Not How You Start, But How You Finish

We do not invest for our clients per quarterly (3-month) increments, or even annually. We invest long-term to help our clients achieve life goals and provide financial freedom. Each quarter gives us a good report on how the stock and bond markets perform and what this means for your investment success. Let's start with what happened in the first quarter of 2025 and remind ourselves that it is not always how you start, but how you finish. 

As measured by the S&P 500 (the 500 largest stocks in the United States), the stock market had its worst first quarter since 2022, falling 4.23%, and this week saw its worst day since March 2020 to start the second quarter. We can see below that March was incredibly challenging. From the recent highs of March 19th through the end of the first quarter (Monday, March 31), the S&P 500 was down 8.50%. 

 

 

Before we examine what is driving this, let's explore some of the other asset classes we invest in. 

As we can see, except for U.S. Stocks, other asset classes did well in Q1. International stocks, U.S. bonds, and the cash in your money market are still earning over 4% (as of April 3, 2025). So maybe things (and your investment performance) are not as bad as the nightly news would make them seem. So, what is the cause of the negative returns in the U.S.? In a word, tariffs. 

So, what exactly are tariffs?

Tariffs are taxes or duties a government imposes on imported or exported goods. They are typically used to protect domestic industries, generate revenue, or influence trade relationships between countries. When a country imposes a tariff on imports, it raises the cost of those goods, making them less competitive than locally produced products. For example, if a country places a 25% tariff on imported cars, the price of those cars will increase by 25%, making them more expensive for consumers compared to cars made in the country. 

This is the simple math of tariffs, but we know there is the nuance of who will bear the cost of the tariff (the company or the consumer), whether the tariff is on parts or the end product, and how those tariffs are collected. All of this adds to the uncertainty around tariffs. 

Are tariffs new?

The short answer is no. Tariffs have existed for centuries and were much higher before World Wars 1 and 2. The decrease in tariffs since the 1930s is primarily the result of several global shifts, mainly driven by the desire for economic recovery, international cooperation, and the evolution of global trade systems. 

In addition to global agreements, many countries signed regional trade agreements, such as the North American Free Trade Agreement (NAFTA) (now replaced by USMCA), that led to tariff reductions between specific countries or regions. These agreements created free trade areas that eliminated or reduced tariffs to promote regional economic growth. This leads to uncertainty with our trade policies with our closest neighbors, Canada and Mexico.

What are the benefits of tariffs?

While most economists view tariffs as trade barriers, there are some benefits to the country that imposes them. Tariffs can encourage consumers to purchase domestically produced goods by making imported goods more expensive, potentially protecting existing jobs and creating new employment opportunities in specific industries (e.g., manufacturing).

The often-cited reason for tariffs is to reduce the trade imbalance by making imports more expensive, thus reducing the amount of foreign goods bought. 

There are also warranted concerns around National Security. Tariffs can protect industries critical to national security. For example, tariffs might be placed on foreign steel imports to ensure a country has a robust domestic steel industry for defense.

And maybe the main reason for our current administration is that tariffs can be used to negotiate in trade discussions with other countries. By imposing tariffs, a country can push for better terms in trade deals or encourage other countries to lower their trade barriers.   

What does all this mean for investors and the economy?

There will be more uncertainty, which takes us to one of our favorite investment principles at Charter Oak: diversification. For several years, market pundits have argued about the lack of diversification and that a diversified portfolio no longer works. We here at Charter Oak have long held our belief that by owning large, mid, and small U.S. company stocks, foreign company stock, U.S. treasury bonds, corporate bonds, and cash – we could give our clients a smoother investment ride and help them achieve their goals. And as we can see in the chart below (the white Asset Allocation square), it works. A balanced portfolio might not always be the best, but it is rarely (if ever) the worst. Remember, friends, it is not always how you start but how you finish… over the long term. 

As always, it is our pleasure to serve you. Please contact your Charter Oak advisor with any questions or concerns.