Q1 Capital Market Highlights

“There are decades where nothing happens, and weeks where decades happen.”

Vladimir Lenin

Tariff Takeover
The quote above is a fair way to describe the week following “Liberation Day,” when tariff talk became action. Or at least, threatened action. We’ll revisit tariffs before concluding this note, but there’s no way to recap Q1 without acknowledging the March anxiety that became a full-blown panic in early April.

Q1 Market
In general, stocks did poorly in Q1, with the S&P 500 falling 4.63%. Looking at the presidential cycle over time, weakness in the first quarter of a new election cycle is not unusual:

Beneath the surface, there were some significant changes to market leadership. The playbook for the past two years has been:

• Large > Small
• Growth > Value
• US > Foreign

In mid-January, the script flipped for two of the three. Small stocks stayed weak, but value overpowered growth and foreign stocks charged higher in the face of US weakness. Here you can see how the domestic outcomes diverged mid-quarter:

Repeating our message from the Q4 note:

Recent history has certainly blessed US investors, but leadership ebbs and flows, with diversification proving valuable in periods when leadership flips:

When you look at stocks globally in Q1, the early February rotation from US to Foreign stocks is striking:

We’re not ready to say that Q1 was the beginning of a years-long shift in investor preferences, but remain diversified to capture whichever leadership takes place.

Q1 Actions
While there was movement in the markets, we took a mostly observant approach. We added modestly to our bitcoin ETF position, though it remains our smallest position. The way portfolios responded to the recent market volatility has us confident in our allocations, but as always we will be looking for any changes that can help reduce risk or increase return potential.

Q2 and Beyond
As noted in the opening paragraph, the early days of April were as eventful for markets as all of Q1 combined. The daily swings were historic, on par with the Global Financial Crisis and COVID. For now, the headline-chasing is subsiding, and with it hopefully the emotions it stirs in investors.

One benefit of market panics is that they can shake out less-committed money and set the stage for higher-than-normal returns. One popular measure of investor sentiment is the Cboe Volatility Index (VIX), calculated using options prices and known as the “fear index” for its ability to measure the extent to which markets are willing to pay for protection. Early April found us in rare company for extreme VIX levels, with higher 1-2 year returns following high VIX readings:

While possible that economic and brand damage has been done that will dent the overwhelming dominance enjoyed by US assets over the past 15 years, it doesn’t mean another crisis is at hand. Investors have become more apt to “shoot first, ask questions later”, and with that phase fading we think calmer heads can prevail to evaluate possible winners and losers.

We’ve had the 10% correction and for a day hit the 20% marker, but historically very few of those episodes developed into something more damaging.

Risks and Outlook
With U.S. consumers (and businesses) generally in good shape, there are three areas on our minds as we look to the rest of 2025:

• Tariffs
• Taxes
• Rates

Tariffs

This is a complex issue, made trickier by the lack of certainty in the ultimate rules. Are they inflationary? Sure, there is no doubt that the cost will either be a hit to profit margins or (more likely) a rise in prices paid by consumers. Are they deflationary? Maybe, if it prompts buyers to buy less. Those opposing forces can be challenging to discern, but as conditions unfold it will become clearer which companies and sectors can adapt and which ones have a tougher road ahead. And the US economy is far less reliant on trade than other countries, so ultimately the impact to our long-term prosperity should not be endangered.

The extra challenge for investors is that there is little clarity on the ultimate path, and the longer that path stays murky the less likely businesses are to make the types of investments that the policies are meant to encourage. So, we wait. Portfolios are broadly exposed to opportunity in the growth sleeve, and broadly shielded from major risks in the defensive sleeve.

Taxes

If tariffs are the veggies we might not feel like eating, taxes and deregulation are the more appealing dessert dangling in front of us. We’ve seen little activity in these areas but extending the 2017 Tax Cuts and Jobs Act is a clear priority for the party in charge.

There seems to be an appetite for raising the SALT (state and local tax) deduction, and chatter of a slight bump in tax rate for ultra-high earners in order to keep/cut taxes for most taxpayers. We’ll again refer you to this collection of ideas that may or may not be in play.

Rates

Federal Reserve policy has been a major driver of market action since the financial crisis, but they’re in a bit of a “wait and see” period. They’ve taken back some of the rate hikes from the inflationary post-COVID period, but have been on hold since December.

Investors are expecting rate cuts to resume in June, with 2-4 cuts coming by the end of the year. But they’re in a tricky spot given the tariff uncertainty, as the economy is generally OK without their help. The exception is the housing market, where cutting short-term rates has thus far had no real impact on mortgage rates.

Despite being prodded for rate cuts by the president, Fed Chair Powell has been vocal that they will follow the economic data for guidance. And the last thing they want to do is make rash decisions in tariff-driven uncertainty and then need to reverse their actions if policies change.

For now, a backburner focus but ultimately the cost of money is a key input to our economy, and the Fed’s success or failure in threading the needle of stable inflation and employment will be a major factor in stock and bond prices.

Conclusion
Despite the uncertainty, we’re confident in the positioning of both our growth and defensive sleeves, and the balance between the two. We’ll continue to monitor conditions, and loop you in on both broad themes and your specific opportunities. As always, we appreciate your trust and welcome your feedback.

*The views expressed represent the opinions of Compass Ion Advisors, LLC, as of the date noted and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial, or legal advice or service to any person. The information contained has been compiled from sources deemed reliable, yet accuracy is not guaranteed.

Additional information, including management fees and expenses, is provided on our Form ADV Part 2 available upon request or at the SEC’s Investment Adviser Public Disclosure website at https://adviserinfo.sec.gov/firm/summary/166418. Past performance is not a guarantee of future results.