2025 Q1 Market Commentary

Navigating the Tides

In 1687, Sir Isaac Newton discovered that the ocean tides are caused by the gravitational pull of the Moon and, to a lesser extent, the Sun. Through Newton's observations, he was accurately able to explain that the gravitational attraction between two bodies is directly proportional to their masses and proximity to one other. So, although the Sun is 27 million times larger than the Moon giving it more nominal gravitational mass, the Moon is approximately 390 times closer giving it more influence over the ocean tides.

It’s a phenomenon we’ve all come to admire in awe. As the Moon's gravity pulls on the Earth's oceans, it creates a bulge of water on the side facing the Moon. At the same time, a second bulge forms on the opposite side due to the Earth's rotation and the inertia of the water. As Earth rotates, different areas move into these bulges, creating high and low tides. The Sun's gravity also influences tides, either strengthening them (spring tides) when aligned with the Moon or weakening them (neap tides) when at right angles.

The financial markets, much like the ocean, move in powerful and rhythmic cycles like our ocean tides. Large gravitational forces pull capital into asset classes with great momentum, only to recede when conditions change. Over the last 5 years, we’ve experienced several distinct tidal cycles, each shaping the investment landscape in profound ways.

First, there was the massive influx of liquidity from global stimulus packages in response to the COVID-19 pandemic. Trillions of dollars were injected into the global economy, fueling a surge in equities, bonds, real estate, and other risk assets alike. Investors rode the rising tide as valuations soared, supported by unprecedented government and central bank intervention.

Then came the swiftest rise in inflation in over four decades, driven by supply chain disruptions, labor shortages, and excessive demand fueled by COVID-19 stimulus measures. In response, central banks, led by the Federal Reserve, embarked on the most aggressive interest rate hiking cycle in a generation. This dramatic gravitational shift led to capital flowing out of riskier assets, exposing overleveraged sectors and creating a recalibration of valuations. Bond yields surged, equity markets stumbled, and the cost of capital increased, reshaping investment dynamics across the board.

More recently, another force has emerged: the rapid rise of artificial intelligence. This technological revolution has ignited excitement and investment in AI-related companies, pushing certain segments of the market to new heights. The transformative potential of AI spans industries, promising increased efficiency, automation, and new economic

opportunities. The mass and proximity of AI has created a Syzygy like event where the gravitational attractions of the Moon and Sun act to reinforce each other. This phenomenon occurs when the Moon aligns perfectly between the Earth and Sun as it also passes closest to Earth. For the Magnificent 7 stocks, their scale paired with AI’s transformative potential has attracted mass investor interest across the globe leaving low tides in other segments of the market.

So, what comes next? The current tidal force to be reckoned with is Tariffs. Policymakers have been playing a high stakes poker match using tariffs as their bargaining chips, leaving investors scrambling to figure out which assets are actually safe versus which just look safe on paper. The end result of the tariff battles has the potential to reshape the outcomes of various asset classes, sectors, and industries by altering trade flows and corporate bottom lines. These measures can trigger shifts in consumer demand, supply chain strategies, and profit margins across a variety of markets. Unfortunately, unlike the tides, we can’t predict how all of this will unravel with precision. We do know financial markets will move quickly on all new information that comes to light, highlighting the importance of risk management and diversification to be prepared for a wide range of potential outcomes.

Fortunately, diversification is back after a long sleep! Bonds have acted as a good ballast to US equities. Through the first quarter, bonds, as represented by the US Aggregate Index, are up 2.74% while the S&P 500 is down -4.27%, back to its September 2024 price levels. To put this in perspective given all the recent headlines, a portfolio allocated 50% to US stocks and 50% to US bonds is down just -0.77% through the first quarter.

While the exact magnitude of the falling tide in US equities remains uncertain, we do know where valuations stand relative to history. Many areas of the market were priced for perfection, meaning any deviation from an ideal outcome — whether in economic growth, earnings expectations, or policy decisions — could trigger a further outflow of capital. Until market participants have more clarity from geopolitical policies and their impact on corporate earnings, we could see a continued tidal shift as capital seeks safer shores.

As stewards of your financial well-being, we want to encourage you by saying it’s not too late to review your balance sheet. Diversification, discipline, and a long-term perspective will always remain the guiding principles of successful investing. The positioning of your financial resources is not a one-time decision but rather a regular practice to ensure you’re comfortable with your positioning given today’s financial landscape, your willingness and ability to assume risk, your life stage, and your goals. Our proactiveness in this endeavor is what will allow us to have peace of mind through the powerful and rhythmic cycles of the market.

If you have any questions about how these market cycles impact your portfolio, we welcome the opportunity to discuss strategies that align with your goals.

*The foregoing content reflects the opinions of Van Hulzen Asset Management DBA "Van Hulzen Financial Advisors" and is subject to change at any time without notice. Content provided herein is for informational purposes only and should not be used or construed as investment advice or a recommendation regarding the purchase or sale of any security. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. Past performance may not be indicative of future results. Indices are not available for direct investment. Any investor who attempts to mimic the performance of an index would incur fees and expenses which would reduce returns. Securities investing involves risk, including the potential for loss of principal. There is no assurance that any investment plan or strategy will be successful.