We are all emotional creatures with a touch of what we like to think of as data-driven logic sprinkled in. But you have to admit that there are differences across the population as to the ratio of the mix. Some are more emotional to the point of hysterics at their worst. Some are more logical to the point of heartless analysis-paralysis at their worst.

To wit, we all have biases, many unknown, that imbue an emotional taint into our thoughts and decision making. One of my most important duties is to help investors keep a balance between emotion and logic in an environment of trust and integrity. This essentially means keeping you on track during times of over-exuberance and times of under-enthusiasm. 

This quarter, let’s take a look at “home” bias and how it affects many investors. Investors often get focused on domestic events forgetting that there is a world of opportunity often not reflected in their investment portfolios. Over the last several years the U.S. market had indeed performed well to the point that many investors forgot about opportunities abroad. Let’s take a look at some indexes for the quarter.

Chart Note: “EAFE” refers to developed international markets and stands for “Europe Asia Far East”

01/01/2025 through 03/31/2025 ©  Past performance is no guarantee of future results. Any fund holdings shown should not be considered a recommendation of any security by the investment adviser. Chart © 2025 Yahoo. All rights reserved. In partnership with ChartIQ. https://www.schwabassetmanagement.com/products/swtsx, https://www.ishares.com/us/products/239637/ishares-msci-emerging-markets-etf, https://www.ishares.com/us/products/239623/ishares-msci-eafe-etf

As can be seen from the chart, SWTX (representative of the overall U.S. stock market) performed at a negative -5.3% for Q1 2025. For those investors who were home-biased and focused on U.S. markets, this trend would have negatively influenced their portfolio significantly and perhaps solidified a negative sentiment moving forward. 

On the other hand, iShares MSCI EAFE ETF returned +8.3% while iShares Emerging Markets ETF returned +4.5% for the quarter. So those investors with globally diversified portfolios would most likely have benefited from the strong YTD push from international markets allocations.

I titled this article as “A Tale of Two Countries” for obvious reasons but it’s also “A Tale of Two Investors” for the quarter. This quarter was a perfect example of why we want to structure our investment allocation based on sound academics and instill discipline over time to take advantage of global opportunities that can benefit us when we least expect them to.

Market Review: 2025 Q1

The Fed kept the federal-funds rate unchanged in the 4.25%–4.5% range in March, citing elevated inflation and an uncertain economic outlook.¹ On inflation, the US core consumer price index, which excludes more-volatile food and energy items, showed prices rose 3.1% from a year earlier in February, the most recent data available, which is more than a percentage point higher than the Fed’s target of 2%.² Meanwhile, the unemployment rate edged slightly higher, to 4.1%, in February.³

1. The federal-funds rate is the overnight interest rate at which one depository institution (like a bank) lends to another institution some of its funds that are held at the Federal Reserve. “Federal Reserve Issues FOMC Statement,” Federal Reserve, March 19, 2025.

2. Inflation data as defined by the consumer price index (CPI) from the US Bureau of Labor Statistics; the core CPI is an aggregate of prices paid by urban consumers for a typical basket of goods that excludes food and energy; Megan Leonhardt, “Markets Celebrate Softer Inflation, but Fed Will Remain on Pause,” Barron’s, March 12, 2025.

3.  Derek Saul, “US Added 151,000 Jobs as Unemployment Rose to 4.1% in February,” Forbes, March 7, 2025.

Tariff Trepidation

The threat of tariffs is liable to loom over markets for the foreseeable future, with levies on China already in place and those on Canada and Mexico set to take effect in early April and there’s no assurance as to what the results of any coming actions will be. 

One period offering perspective on this issue is President Trump’s first term in office. Beginning in 2017, the administration eyed China as a target and, by 2018, began imposing tariffs across a range of products. The next couple of years saw back and forth trade discussions that eventually led to an agreement, though pre-existing tariffs remained in place. Despite all this uncertainty, both China and the US posted higher cumulative returns than the MSCI World ex USA Index over the four years of Trump’s term.  

Past performance is not a guarantee of future results. Tariffs are only one of many factors that can impact security prices. Investors may be better off sticking with the plan rather than trying to outguess the market based on potential tariff policy changes.

And finally, I’ve been seeing headlines pop up on “stagflation” which in my view is most likely click-bait, feeding on investor fears. But, let’s hypothesize for a moment that we are in fact in for a period of stagflation. Should investors act on this concern with their investments?

Since 1930, the US has seen 12 years when negative GDP growth coincided with positive changes in the consumer price index (CPI). The US stock market’s real return—its return in excess of inflation—was positive in nine out of those 12. That hit rate is close to the frequency of positive real returns across all years between 1930 and 2024, which is 68%.

This is another example demonstrating how concerns over the economy shouldn’t drive investment decisions.  Predictions about the direction of the economy are continuously forming, but the market itself remains the best predictor of the future. That means market prices are set to levels to deliver positive expected returns even amid concerns over future economic outcomes.

In USD. Sources: Bureau of Labor Statistics, US Bureau of Economic Analysis, S&P 500 Index: January 1990–Present, Standard & Poor’s Index Services Group; January 1930–December 1989, Ibbotson data courtesy of © Stocks, Bonds, Bills, and Inflation Yearbook® Stocks, Bonds, Bills, and Inflation Yearbook®, Ibbotson Associates, Chicago. S&P data © 2025 S&P Dow Jones Indices LLC, a division of S&P Global. All rights reserved. US inflation is the annual rate of change in the consumer price index for all urban consumers (CPI-U, not seasonally adjusted) from the Bureau of Labor Statistics. Annual GDP growth rates obtained from the US Bureau of Economic Analysis. GDP growth numbers are adjusted to 2012 USD terms to remove the effects of inflation. Indices are not available for direct investment; therefore, their performance does not reflect the expenses associated with the management of an actual portfolio.

To wrap things up, the theme at the beginning of this report was about global opportunities and I think this graphic of country returns for the first quarter helps bolster the idea of global diversification.

Past performance is no guarantee of future results. Country returns are the country component indices of the MSCI All Country World IMI Index for all countries except the United States, where the Russell 3000 Index is used instead. Global is the return of the MSCI All Country World IMI Index. MSCI index returns are net dividend. Indices are not available for direct investment. Their performance does not reflect the expenses associated with the management of an actual portfolio. Frank Russell Company is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. MSCI data © MSCI 2025, all rights reserved.

Morgan H Smith Jr. is an investment advisor with WorthPointe, LLC, a registered investment adviser  in San Diego, Calif. WorthPointe  is registered with the Securities and Exchange Commission (SEC). Registration of an investment advisor does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the commission. WorthPointeonly transacts business in states in which the firm is properly registered or is excluded or exempted from registration. A copy of WorthPointe’s current written disclosure brochure filed with the SEC, which discusses among other things, WorthPointe’s business practices, services, and fees, is available through the SEC’s website at www.adviserinfo.sec.gov.

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