The new presidential administration is moving quickly on its agenda, bringing an air of caution to forecasts for the economic environment.  Businesses, consumers and the Federal Reserve have all taken notice and appear to be waiting to see how things settle.   Concerns that new tariffs on imported goods may lead to an economic downturn rattled the capital markets in recent weeks.  Whether tariffs are a negotiating tactic or an ongoing change to federal trade policy, they have raised uncertainties in the minds of investors, which in turn creates volatility in the capital markets.

Tariffs are intended to promote domestic production.  While that may prove true longer-term, they create near-term pressure on supply chains that can often take time to adjust.  In early March, the Atlanta Fed GDPNow Tracker abruptly shifted its estimate for first quarter GDP growth from a 2.3 percent upswing to a 1.5 percent contraction.  The dramatic change sent a shudder through Wall Street.  It appears the indicator was impacted by businesses purchasing foreign goods ahead of new tariffs that are scheduled to go into effect.  Buying foreign goods caused a surge in the trade deficit that creates a drag on the economy.  Of course, with inventories now topped off, purchases for the remainder of the year are likely to be lower.  That suggests the slip in the GDPNow indicator is temporary, representing a shift in the timing of spending rather than a change in overall outlays.  

The Federal Reserve has paused further rate cuts until the full impact of new trade policies can be evaluated.  At their January and March meetings, the Federal Open Market Committee (FOMC) kept interest rates unchanged and took a relatively neutral position on their economic outlook.  Interest rates remain stable, with the benchmark ten-year U.S. Treasury note yielding 4.3 percent, a slight easing from the 4.6 percent level at year-end.  Recent commentary from members of the FOMC indicate further rate cuts remain in the forecast for the year, and we expect additional clarity when the FOMC meets again the first week of May.  In the meantime, the latest measure of the Consumer Price Index from the U.S. Bureau of Labor Statistics shows a relatively mild inflation of 2.8 percent over the past twelve months, a figure that lingers just above the Fed’s two percent target level.

In recent years, shares of a handful of technology companies, called the “Magnificent 7” have carried the stock market to record highs.  The success of those companies (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta and Tesla) caused the S&P 500 Index to become more heavily concentrated.  By the end of 2024, the top ten companies in the S&P 500 represented a historic 38.7 percent of the index’s total value.  As investors pulled back from riskier assets during the first quarter, prices for the Magnificent 7 came under pressure. Those same seven stocks that gained an average of 60 percent in 2024 have declined an average of roughly nine percent so far this year.  

Our nation’s economy is measured as the sum total of spending by consumers, businesses and government.  The largest and most important component to that tally comes from the consumer, which represents roughly two-thirds of the economy.  The data on employment and personal income continue to be positive.  The latest unemployment figure of 4.1 percent is strong, and the economy continues to produce new jobs.  Corporate profits are also doing fine, with analysts forecasting growth of 11.1 percent for calendar 2025.  At this time, the Federal Reserve appears to be in an accommodative mood.  The Fed is expected to reduce short-term interest rates a couple times this year.  Despite recent turbulence, this remains a productive environment for the capital markets.

On an administrative note, we just completed the annual update of our Form ADV Part 2A and 2B (our Brochure).  As an advisory firm overseen by the Securities and Exchange Commission (SEC), West Oak Capital must offer to send our Brochure each year to clients who would like our most recent version.  There were no material changes to our Brochure this year.  Please contact us if you would like a copy of our Brochure.

It is remarkable how quickly the news cycle changes its focus, with attention already shifting away from the catastrophic fires in Southern California.  January seems like a distant memory, except to those who lost their homes and neighborhoods.  We would like to send a note of encouragement to our clients and friends who are struggling with the long road to recovery from such a terrible loss.  Your patience and resilience will help you navigate this challenging moment.

We hope you and your family enjoy a wonderful Spring season.  As always, we welcome your call if you have any questions or thoughts you would like to discuss with us.