Q1 2025 Review: Defying Gravity

They say that Michael Jordan’s “hang time” was only .9 seconds, but through technique, body control and timing, it looked like he could fly. The Bar-tailed Godwit is a bird whose migration patten spans 8,000 miles nonstop from Alaska to New Zealand, burning half its body weight in the 9-day flight. When a child “accidentally” lets go of a balloon, they’ll think it’s headed straight for the moon.

Jordan lands to a thunderous applause. The Godwit must rest and recover. The balloon finds shelter in a tree in the next town. Gravity always wins. 

The markets went from unbridled euphoria to extreme pessimism in just a few weeks. It began with the release of a Chinese AI model and accelerated when President Trump announced sweeping global tariffs. As a result, the stock market’s core pillars – globalization, technological advancement, and American Exceptionalism – have come under serious pressure.

But like gravity, the laws of economics are inescapable. The good news is that eventually, hopefully sooner rather than later, the laws will be recognized and the pillars reinforced.

Pillar 1: Global trade drives prosperity

It’s why half of the profits from the S&P 500 come from overseas, why a decent pair of shoes costs $100, and why Apple can manufacture an iPhone for a fraction of what it cost to build the original supercomputers. Countries specialize in what they are best suited to produce, and when trade flows, a rising tide lifts all boats.

Last week’s tariff announcement represents the biggest potential shift in the global financial system since the end of World War II. Supporters view it as the opening salvo in negotiations to reduce trade barriers for the benefit of the American worker. Detractors warn it could trigger pain for consumers and undermine the American led world order.

Regardless of how this plays out, we know that less trade is bad. The longer high tariffs remain in place, the more the economy will slow as consumers face higher prices, companies try and protect margins by laying off employees, and farmers find hostile international markets for their crops. Something has to give.

Pillar 2: Technological revolutions drive long-term growth   

We’ve written over the past year about the life changing potential of artificial intelligence. The possibilities are endless. However, in economics, massive investments require massive returns. Right now, business models are being disrupted, competition is increasing, and long-standing moats are being challenged. This is healthy, and over time, increased scrutiny will separate hype from durability. This process won’t be linear, but the seeds of change are being planted amongst the chaos.     

Pillar 3: American Exceptionalism will continue to lead global markets

We believed, and still do, that the U.S. is the best place to do business; innovative, dynamic, and governed by the rule of law. However, the first quarter saw global markets outpace the U.S. for the first time since the early 2000s. America’s gravity-defying exceptionalism doesn’t have to end, but it will be tested without a coherent, forward-looking trade policy. Rebuilding a resilient supply chain alongside trusted allies will require time and commitment, but it’s also what will allow American leadership to endure and evolve in a changing world.

The Coming Recession

President Trump told the world he was going to implement tariffs, and then he did, yet the market was still caught off guard. Oil and other industrial commodities dropped sharply. The bond yield curve inverted, with long-term interest rates falling below short-term ones, a classic recession signal. Days later, the bond market reversed course again, this time pricing in the inflationary impact of tariffs, and yields rose.

When we first sat down to write this letter at the beginning of April (before the tariffs) the title was, “The Coming Recession.” The economy was clearly slowing. Trade uncertainty, lingering inflation, and a fully priced stock market left us scratching our heads; how much longer could markets defy gravity?

Despite the title, our outlook was — and still is — optimistic. Rising uncertainty is revealing some of the most compelling investment opportunities we’ve seen in years.

We don’t know how far the Administration will go or how long it will take markets to fully absorb the economic impact of tariffs — or whether a formal recession will even occur. But we are closer to a slowdown being priced into the market than we were just a few weeks ago, and now, the whole store is on sale!

Many of the companies we were buying have effectively been in recession for two years. Their inventory levels are lean, their balance sheets strong, and their end markets primed for long term secular growth. Now we can buy the same business at a much lower price.

Looking Ahead

While the laws of physics do not apply to stocks, the gravitational forces pressuring these core pillars almost always lead to an overcorrection. Fear begets more fear, and the forces that should bring prices back to equilibrium take time. We fundamentally believe that the pillars supporting markets for decades – global trade, technological advancement, and American exceptionalism – will regain their footing, whether through elections economic pressure, or both.

In the meantime, our balanced portfolios are doing what they were designed to do, with short-term bonds and cash helping to cushion recent volatility. We are entering uncharted territory, but the current volatility is self-induced and resolvable. In the meantime, we’ll look to sell some of our stocks that have held up the best and replace them with stocks that provide the best opportunity for growth. Our process is rooted in patience, and keeps us grounded to the fundamentals, not the headlines. Gravity may bring markets back to earth, but clarity in how we respond can help us fly through the storm.

_{Compass Wealth Management LLC is a SEC registered investment advisor, clearing transactions primarily through Pershing Advisor Solutions and Pershing LLC subsidiaries of Bank of New York Mellon Corp. This letter is written by Compass for the benefit of its clients and does not necessarily represent the opinions of its affiliated organizations. It is based on information believed to be reliable, but which is not guaranteed to be correct. Nothing herein shall be construed to be a solicitation to buy or sell securities, indicate that past performance is predictive of future returns, or recommend individual investments.}