First Quarter Newsletter

Responsible Guidance:  First Quarter 2025 Newsletter, April 2025

Should we be doing something different?...

Many people have found themselves focusing on recent news headlines, or stock market volatility, or both. Understandably, some have asked a version of the question “Should we be doing something different?”.

It is a good question and though the question may be asked using those exact words, the reason why the question is being asked needs to be identified.  For Baron Financial Group clients, who are already invested in diversified portfolios based on their profile, our response starts with, “it depends”.  

One might think that as the markets change, investment strategies should be reviewed for change.  Though reviewing investment strategies is always open for consideration, the real reason for considering a change to your investment strategy is not based on market activity but starts with identifying if anything has changed with you.  We ask, “Has anything changed in your life, outside of the markets?”. 

If nothing has changed with your job, budget, large-planned expenditures, or other financial goals or objectives, most often there is no reason to do something different with your globally-diversified-investment strategy.  If you are wondering why, it’s because a good plan incorporates market corrections and bear markets into the planning process.  So, although portfolio appreciation is always preferred, the reality is that nothing goes up in a straight line forever.  That is why we choose a mix of investments for our clients ahead of time.  Note that we use this process for our own personal money as well.  Using a mix of assets may not perform as well as the general stock market when things are going well, but it does allow, statistically, for insulation from the worst performing assets when times are challenging.  That is why a change is usually not needed, because the diversified strategy was implemented ahead of the challenging times.

As you read through the newsletter, you may notice that performance leaders rotate.  In the fourth quarter of last year, and for all of 2024, U.S. stocks significantly outperformed international stocks.  You may recall a paragraph from our previous newsletter:

Over time, we do believe that the leaders in performance will rotate, so it is important to be diversified.  We want to make sure, if you are a diversified investor, you do not “anchor” to the S&P 500 performance this year as you evaluate your investments in Your Personal Economy^SM, the aspects of your financial life that are unique to you.

As you read the details, you will find the opposite happened in the first quarter of 2025.  Not only did U.S. stocks underperform international stocks in the first quarter, but that group was the worst performing of the investments we cover in this newsletter. 

A Global Perspective

A core objective for our customized Baron Financial Group investment strategies is global diversification. Global diversification means including investments based both in the U.S., as well as internationally in developed and developing countries. There are popular benchmark indexes that provide perspectives about the performance of global investments.

For equities, we monitor the MSCI ACWI All Cap Index. This index represents stock investments across 23 developed and 24 emerging markets. The index was down 1.61% in the first quarter.  The negative performance was primarily from U.S.-based stocks as international stocks performed positively in the first quarter.  You may remember the opposite occurred in the fourth quarter last year, when U.S. stocks were positive and international stocks struggled.  The overall negative performance was the second consecutive quarter of negative performance.

For fixed income, or bonds, we track the FTSE World Government Bond Index. The index tracks sovereign debt from 20 countries, denominated in their respective currencies. The index was up 2.57% for the first quarter.  Though inflation concerns were resurfacing in the U.S., investors did buy government bonds as a flight to quality.  Additionally, many foreign central banks were cutting interest rates to stimulate growth, given the global economic uncertainties.  The flight to quality trades and cutting interest rates are typically helpful for bond performance..

U.S. Economy

The U.S. economy continues to grow, however, data compiled by the Atlanta Federal Reserve suggests we could see economic contraction in the first quarter if there are no improvements in the final data points for the first quarter.  The employment situation remains a concern, as the unemployment rate is staying above 4%.  The Federal Reserve has been holding interest rates steady due to inflation concerns resurfacing.  However, the most recent inflation data appears to be mixed.   

The Bureau of Economic Analysis (BEA) announced in its final estimate for the fourth quarter of 2024 that real Gross Domestic Product (GDP) increased at an annual rate of 2.4%.  This was a slight decrease from third quarter growth of 3.1%.  The continued growth was driven by increases in consumer spending and government spending (the full press release can be found at https://www.bea.gov).  This was the tenth straight quarter of positive economic growth.

Due to the normal delay in receiving growth data from the BEA, the Federal Reserve Bank of Atlanta publishes a “nowcast” by estimating GDP growth for the most recent quarter (in this case the first quarter of 2025) using an approach like the BEA. On April 9, 2025, the estimate for first quarter GDP from the Federal Reserve Bank of Atlanta was negative, -2.4%.  Should actual data continue at its current pace, this would be the first quarterly economic contraction in over 2 years.  Note that this estimate updates regularly and is subject to change. The “nowcast,” along with the methodology, and additional information can be found at: https://www.atlantafed.org/cqer/research/gdpnow.

Job growth continues, but the unemployment rate remains above 4.0%.  According to the Bureau of Labor Statistics (BLS), the U.S. gained 288,000 jobs for the month of March, and the unemployment rate ticked up to 4.2%.  BLS indicated job growth was notable in  health care, social assistance, and transportation and warehousing. With the strike ending in retail trade, there was some growth in retail jobs as well (full press release can be found at: https://www.bls.gov).

U.S. Stocks

The S&P 500, an index consisting of roughly 500 of the largest U.S. domestic stocks, struggled in the first quarter and was down, -4.27%.  After being the best performing index in 2024 of those we cover in the newsletter, this popular equity benchmark was the worst to start 2025.  Technology and consumer discretionary stocks were the biggest drags on performance, while energy, utility and healthcare stocks offered some positive contributions.

For technical analysts and trend followers, the index fell below the 50-day moving average and 200-day moving average in early to mid-March.  The index remained below these moving averages at the end of the first quarter.  The last time the index was below both moving averages was October 2023.

Dividing index components into growth and value, value-focused stocks lead in the first quarter.  Growth stocks have mostly dominated over the last decade.  Value last outperformed on a calendar year basis in 2022, when most equity indexes were struggling.

International Stocks

International-developed-country stocks (such as those in the European Union and Japan), measured by the MSCI EAFE index, were up 6.86% for the first quarter.  Non-developed, or emerging-country stocks (such as those located in Brazil, Russia, India and China), measured by the MSCI EM index, were also up, gaining 2.93%. 

After struggling in 2024, relative to U.S. stocks, international stocks outperformed in the first quarter helped by the potential growth expected from many foreign central banks continuing to cut interest rates.  The last time international stocks outperformed U.S stocks on a calendar year basis was 2022, and then 2017 prior to that.

Bonds

U.S. Domestic Fixed Income (bonds), as measured by the Barclays U.S. Aggregate Bond Index (gauges performance of investment-grade intermediate bonds), was up 2.78% to start the year. The Federal Reserve has paused cutting interest rates.  However, investors have sought safety in bonds as most government bond yields are lower than at the start of the year.  When bonds are purchased, driving bond prices higher, interest rates move lower, possibly resulting in gains for existing bond holders.  However, the opposite can occur when there are more bond sellers than buyers. 

The 10-year U.S. Treasury bond yield finished the first quarter at 4.23%, below the 2024 year-end rate of 4.58%. 

If you plot interest rates versus the time-to-maturity to earn those rates, you have created a yield curve. We continue to monitor the changing shape of the yield curve for U.S. debt issues, and what that may signal. Using the U.S. Government 2-year bond rate as a proxy for short-term rates and the 10-year U.S. Government bond rate as a proxy for long-term rates, we calculate the difference between the rates, which provides a possible indicator for the future direction of the economy. A steep spread (long-term rates higher than short-term rates) indicates potential future economic expansion, and fixed-income investors are compensated for taking longer-term risks. A flat spread (long-term rates match short-term rates) is a possible indicator of economic uncertainty, and longer-term investors are not being compensated for investing in longer-dated securities. An inverted spread (short-term rates are higher than long-term rates) possibly indicates future economic contraction.

At the end of the first quarter, the 2-year rate was 3.89% (and 10-year 4.23% per above), keeping the shape of the yield curve slightly positive, at 34 basis points (a basis point represents 1/100 of 1%).  The yield curve was positive by 33 basis points to start the year.  So, although rates are lower overall, the shape of the curve remained similar to the start of the year.

As a reference, the yield curve was inverted (short-term rates higher than long-term rates) from the third quarter of 2022 to the third quarter of 2024.  You may recall the Fed started raising rates in March 2022 to fight inflation and then began cutting rates in September 2024 with inflation reducing.

If the economy continues to grow and if inflation slows, the curve could be indicating continued growth opportunities for the economy with long-term rates possibly remaining higher than short-term rates.

Real Estate and Housing

Commercial real estate, as measured by the FTSE NAREIT All Equity REIT (Real Estate Investment Trust) Index, regained some traction from the fourth quarter of 2024, producing a positive 2.75% return.  

According to Freddie Mac (FM), the average 30-year residential home mortgage rate dropped to 6.62% (as of 4/10/2025). During the past 52 weeks, the rate has been between 6.08% and 7.22%.

Natural Resources

The Bloomberg Commodity Index was the best performing index that we cover.  It was up 8.88% in the first quarter. Within the Natural Resources category, natural gas, copper and precious metals had a solid quarter.  Detractors from positive performance included corn, soybeans, and aluminum. 

Baron Client Strategies

Planning for multiple outcomes with Your Personal Economy^SM is critical to helping our clients answer the simple question "Am I going to be OK?"..

As clients know, we are Registered Investment Advisors (fiduciaries) and we operate as fee-only advisors, so we do not receive a commission for making investment transactions. A big reason your Baron team makes trades is to align clients' portfolios with their customized, risk-appropriate globally-diversified strategy. Also, we believe the actions we take are potentially strengthening the clients' portfolios or financial positions. We use this same approach with our own personal money.

No matter the economic environment, our basic principles remain:

Create a globally-diversified and risk-appropriate strategy.  Validate the investment choices versus peer investments.  Rebalance when needed. Test the strategy in a comprehensive financial plan and obtain regular feedback to update information and advance your financial position.

Your Service Plan

One of our primary roles is to educate our clients to make informed decisions about reaching their goals. Critical to that process are plan reviews, a process that focuses our attention on your goals, takes account of any changes in your situation and allows us to alter the course, as necessary. If you have experienced any changes to your financial position or are considering changing financial goals and objectives, please let us know.

Your Personal Economy^sm

Concluding Comments

When the tone of news stories sounds cautionary or even alarming and there is volatility in the markets, it is natural to think a change may be needed.  However, if the proper work is done ahead of time and volatility is planned for, history suggests sticking with a diversified strategy can offer the best chance for financial success.  If you have any questions or concerns about whether your investment strategy and financial plan are right for you, please reach out to us to discuss these items and Your Personal Economy^SM.

Baron Updates  

We hope you enjoyed the Spring Training Baseball game in Sarasota! It was our pleasure to host, and we enjoyed the opportunity to see so many of you! Please save the date for our next client appreciation event, Casino Night 2025, in New Jersey – October 9, 2025 (please note the date change to October 9th). Details to follow. We hope to see many of you there!

April is “Financial Literacy Month”, and a good time to visit our website blog to read or view our educational content. Check out our tips to help create an effective spending plan and look for an upcoming educational post with some new financial planning numbers for 2025. The Baron Advisors are often called upon by journalists for their insights on financial planning and investing.

Remember that you can also visit our website to gain access to your client portal. Just click on the client-portal tab, which will allow you to view your account information. The client login requires a username and password to gain access to the portal. Please let us know if you would like to create your portal login or if you would like to learn more about what the portal provides, including paperless statements. Contact Baron at 1-866-333-6659 or at info@baron-financial.com to enroll.

Please contact us if you would like a copy of our current registration (ADV) with the Securities and Exchange Commission. You can contact our firm (www.baron-financial.com) at 1-866-333-6659 or at info@baron-financial.com. You can also find our ADV through the Investment Adviser Public Disclosure system at www.adviserinfo.sec.gov.

Please let us know if you have any questions or changes to discuss with us. 

Happy Spring!

Warmest Regards,

Baron Financial Group, LLC
www.baron-financial.com

This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. The opinions expressed are as of April 16, 2025, and may change as subsequent conditions vary. The information and opinions contained in this material are derived from proprietary and non-proprietary sources deemed by Baron Financial Group to be reliable, are not necessarily all-inclusive and are not guaranteed as to accuracy. Past performance is no guarantee of future results. There is no guarantee that any forecasts made will come to pass. Reliance upon information in this material is at the sole discretion of the reader. Investment involves risks. International investing involves additional risks, including risks related to foreign currency, limited liquidity, less government regulation and the possibility of substantial volatility due to adverse political, economic or other developments. The two main risks related to fixed income investing are interest rate risk and credit risk. Typically, when interest rates rise, there is a corresponding decline in the market value of bonds. Credit risk refers to the possibility that the issuer of the bond will not be able to make principal and interest payments. Index performance is shown for illustrative purposes only. You cannot invest directly in an index. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment will either be suitable or profitable for a client or prospective client’s investment portfolio. Historical performance results for investment indices and/or categories generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. Inclusion of index information is not intended to suggest that its performance is equivalent or similar to that of the historical investments whose returns are presented or that investment with our firm is an absolute alternative to investments in the index (if such investment were possible). Investors should be aware that the referenced benchmark funds may have a different composition, volatility, risk, investment philosophy, holding times, and/or other investment-related factors that may affect the benchmark funds’ ultimate performance results. Therefore, an investor’s individual results may vary significantly from the benchmark’s performance.