Investment Insights

“April is the cruelest month” according to poet T.S. Eliot. We know the feeling. After a buoyant reaction to President Trump’s election, markets have now given back most all of the post-election rally in reaction to recent tariffs. For the first quarter of 2025, the S&P 500 fell by -4.3% while global equities were mixed. The MSCI World fell by -1.7% for the first quarter, but Europe was higher by 6.1%. The benchmark 10-year US Treasury rate (UST10) fell from 4.57% at the beginning of the year to 4.21% (down -36 bps) driving positive total return for the quarter (4.0%). Looking at other indicators for the first quarter, the US dollar index (DXY) fell (-4.7%) while gold (XAU, +17.5%) rose strongly to a new record high ($3,330). WTI oil was relatively unchanged (-2%).

U.S. equity markets have fallen further since the end of the quarter, driven by the Presidential announcement of onerous reciprocal tariffs on April 2. The S&P 500 is in correction territory (-10%) as of this writing. Shortly after the tariff announcement, the Trump administration implemented a 90-day pause in most of the tariffs with the notable exception of China. Despite this reversal, the prevailing market mood remains fragile. The dollar has declined, and Treasury yields have been volatile. The action in the Treasury market was particularly worrisome, as typically in times of equity market stress, we would expect to see Treasury rates decline in a “flight to safety” bid.

We caution that the end state of the tariff regime remains unknown, and, even if it were known, it is nearly impossible to have conviction views about the long-term impacts and ramifications that will develop. Will the China tariffs remain in place or be reduced? Will trade move to lower cost jurisdictions, and how quickly? Will the U.S. be able to onshore more manufacturing activity as a result of the tariffs? Will we bring back low-value production skills such as apparel and furniture? What and by how much will other countries retaliate? Given the very high level of uncertainty, we emphasize the importance of not reacting to every headline in maintaining a long-term, disciplined portfolio approach to investing.

Meanwhile, the threat of elevated tariffs puts the Fed in a very tough spot. The Fed has indicated that it is on hold for the moment, although interest rate futures are pricing in three -25 bps cuts for the year. We note that core PCE inflation has been stuck around 2.8% (vs. Fed’s 2% target). We also note that inflation expectations have risen materially, with the one-year inflation outlook from the University of Michigan hitting its highest level since 1981. We acknowledge that this is a volatile data series, but, in our view, the Fed has a real problem on its hands. We believe the Fed is not in a position to cut rates given the current inflation dynamics, despite the Atlanta Fed’s GDPNow indicator showing as negative for 1Q25 and rising chances of a recession. At this time, our base case remains that the U.S. economy will slow materially in 2025, but we have not yet changed our house view to price in a recession as the base case.

Program Update
Following the conclusion of the first quarter 2025, but before the tariff turmoil took place, our investment committee implemented a streamlining of the advisory portfolios to focus our strategies in specific style funds (such as value or growth), while reducing allocations to broader “blend” style funds. We also elected to maintain our exposure to emerging markets equities, given our view that active managers can add alpha in this space and to preserve global diversity in equity exposures. We believe that the recent changes in focused style allocations should allow us to better manage our exposure to desired equity strategies. We have continued our partnership with global investment management firm BNY Mellon for consulting services on the advisory portfolios.

After President Trump’s tariff announcement, our investment committee conducted an additional portfolio review to ensure we remain comfortable with portfolio allocations in light of the potential economic developments. We note that the 90-day pause in tariffs adds additional uncertainty to the long-term impacts from tariffs. We will continue to monitor market volatility, but for the time being we have largely maintained our positioning in the long-term asset allocation portfolios, with one exception. For the Growth strategy portfolios only, we have trimmed exposure to small- and mid- cap equities, while adding to dividend paying equities. As always, we will continue to monitor the advisory portfolios closely although we emphasize the portfolios are specifically managed for long-term asset allocation and not tactical trading.

Summary Market Views
In the table below, we update our Amerant Market Views, which represent our investment team’s tactical views based on investment valuations and macro trends. As a reminder, these are not client-specific recommendations, and clients should consider their financial goals and long-term objectives when determining their asset allocations. We have made some minor adjustments to our views across both equities and fixed income. For equities, we reduced overweight to small and mid caps.

We have revised our maximum underweight on cash, to be less underweight. We make this call as an acknowledgement of the uncertainty in the environment as well as our view that the Fed will be unable to cut rates as aggressively as they otherwise would have in light of sticky inflation. We maintained our overweight allocation to investment grade debt and introduce an overweight to securitized bonds, both because we favor an “up in quality” credit bias at this point in the economic cycle. We maintain a neutral position on high yield, and similarly move to a more neutral view on emerging markets (EM) fixed income (in U.S. dollars). That said, we believe the attractive carry on both high yield and EM debt is important for clients that are focused on income. Therefore, we maintained our existing allocations on advisory portfolios despite the tactical moves summarized below.

This information is being provided for informational and educational purposes only to support our general market commentary. It should NOT be interpreted as investment advice regarding any specific security or investment strategy. See the disclosures at the end of this presentation for additional important information.

When Life Gives You Lemons, Make Lemonade

In last quarter’s note, we wrote “all that we can say for certain is the amount of uncertainty in the year ahead will be high.” Indeed, 2025 is shaping up to be an uncertain and volatile year in markets. Despite this, we reiterate that the U.S. economy came into the year on firm footing. We do expect the economy to slow down, but over the long run, financial markets reflect company and investment fundamentals. In equities, we remain cautious on valuations in large cap growth, but are poised to become more constructive if valuations continue to decline. In fixed income, we see risks as balanced and believe this asset class is best for investors looking for income rather than capital appreciation.

Notes: Asset class performance is in USD and refers to the following indices: Equities: US Large Caps (S&P 500), Emerging Markets (MSCI EM), Europe (MSCI Europe), Japan (MSCI Japan). Fixed Income: 10-Yr. US Treasuries (BofAML US Treasury Current 10-Yr.), Emerging Markets Sovereign (USD) (EMB ETF), Emerging Markets Sovereign (LCL) (LEMB ETF), US High Yield (BofAML US HY Master II), US Investment Grade (BarCap US Aggregate Bond). Source: Morningstar. (1) Strategy returns net of mutual fund expenses and Amerant Investments standard management fees.

On these tables, you can see index and strategy returns for the first quarter of 2025, compared to 2024 full year performance.

The first quarter of 2025 experienced negative returns in U.S. equities while fixed income was modestly positive. For 2024, index returns were negative in 10Y Treasuries, while investment grade was barely positive.

For the first quarter, returns were modestly negative in the income portfolios, while also declining in the income and growth and growth strategies. Our current allocations are overweight U.S. value relative to European equities, which drove performance to lag somewhat. As well, the income portfolio emphasize credit in order to generate positive income for clients, which was impacted by wider credit spreads. As always, we will communicate any changes in our views and positioning going forward.

⁽¹⁾Returns may vary. Past returns are no indication of future performance. Returns up to February 2020 are based on A shares, which were used on the portfolios up to that month, net of the then standard AMTI 1% management fee. Returns from March 2020 to June 2021 are based on I (or similar) shares, which have no 12b-1 fees, net of a standard AMTI 1.25% management fee. Returns starting July 2021 are based on I (or similar) shares, which have no 12b-1 fees, net of a standard AMTI 1% management fee.

⁽²⁾Monthly returns before February 2010 are those of the offshore corresponding strategies. For the Dynamic portfolio, monthly returns before November 2009 are those of the Income & Growth portfolio, which is the neutral positioning of the Dynamic portfolio. Dynamic portfolio started in November 2009.

For the one year through 1Q25, the Income Portfolio returned 3.7%, the Income & Growth Portfolio returned 2.9%, and the Growth Portfolio returned 5.8%. The longer-term performance figures remain positive across all strategies.

As always, we take the trust you have placed in us very seriously. In our day-to-day operations, we continue to follow current events and the reactions of the markets closely, and we stand ready to adjust your portfolios accordingly.

To obtain more detailed information on our market views or the performance of your advisory portfolio, please contact your investment consultant at Amerant Investments by calling (305) 460-8599.

Sincerely,

Amerant Investments, Inc.

https://www.amerantbank.com/