Diamond Capital Management's Market Commentary
March, 2025
Andrew Khosrofian, CFA, CAIA
Assistant Vice President, Portfolio Manager & Analyst
Executive Summary:
- The U.S. economy in February maintained steady growth with a healthy consumer base and low unemployment.
- Challenges still exist from persistent inflation, a cooling labor market, and looming policy shifts related to tariffs and immigration.
- Investor anxiety increased, as reflected by a 19.5% surge in the VIX.
The U.S. economy enters March 2025 with strong consumer spending and growth from late 2024, tempered by volatility from potential tariffs, a cooling labor market, and policy shifts under the new administration.
Tariffs against Mexico and Canada in different forms have been delayed twice in 2025, contributing to market uncertainty. Markets have reacted sharply to news regarding tariffs, inflation, and labor, leading to multiple trading days with S&P 500 swings of +/- 1%. Investor anxiety surged, as reflected in a 19.5% increase in the CBOE Volatility Index, known as Wall Street’s “fear gauge”. While the Magnificent 7, after averaging 86% annual returns the past two years, dropped 6.47% YTD through February after a steep decline of 8.73% last month. Non-IT sectors have buoyed the S&P 500 to a 1.44% YTD gain, while other domestic asset classes have been less fortunate. The Russell 2000, representing small-cap stocks, declined roughly 5.4% in February and is down 2.87% YTD.
International markets have benefited from diversification away from U.S. markets. The MSCI ACWI ex. U.S. index, a broad exposure to developed international and emerging market companies, is up 5.52% YTD through February. While valuations in this space have been favorable, returns may have been amplified by a weaker dollar amid soft retail sales and inflation worries. However, ongoing geopolitical risks and tariffs could strengthen the dollar and reverse these gains.
Despite the turbulence, U.S. unemployment holds at 4.1%, manufacturing has expanded for two straight months, and 2025 forecasts show 2.3% real GDP growth, cooling inflation (PCE 2.6%, CPI 2.4%), and 10% S&P 500 earnings growth. A continued “goldilocks” scenario with above potential Real GDP growth and manageable levels of inflation remains in play, and the administration’s push for peaceful resolutions in global conflicts could stabilize domestic and international markets by easing supply chain pressures.
In summary, while short-term volatility may test investor’s resolve, history reminds us that maintaining a long-term investment strategy has consistently rewarded patience, resulting in the U.S. market delivering robust returns over decades. Underpinned by our nation’s abundant natural resources, exceptional human capital and the resilience of the world’s largest economy, we believe U.S. stocks will continue to reward investors, regardless of political leadership.
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