Trilogy Investment Update - May 2025

Financial markets experienced heightened volatility in April, largely driven by US President Trump’s “Liberation Day” announcement regarding global trade tariffs. As the month progressed, market turbulence began to ease, retreating from the extreme levels seen earlier. Historically, such elevated volatility has often presented attractive buying opportunities for investors with a medium- to long-term investment horizon.

The S&P 500 came close to entering bear market territory in April, having declined nearly 20% from its peak on 19 February. Note: A bear market is typically defined as a drop of 20% or more from a recent high.

Bear markets are relatively rare. Over the past 50 years, the S&P 500 has experienced only seven such downturns. The most recent occurred in 2022, when surging inflation led the Federal Reserve and other Central Banks, including the Reserve Bank of NZ to implement aggressive interest rate hikes, resulting in a 25% market decline. While notable, this drawdown was milder compared to the 49% decline during the dot-com crash and the 57% fall during the 2008 financial crisis.

These historical events serve as a reminder of the cyclical nature of financial markets. Although bear markets can be unsettling, they are a normal part of long-term investing and often pave the way for strong recoveries once economic fundamentals improve and investor confidence is restored.

Key risks to watch:

• Trade Tariff Uncertainty: Markets remain sensitive as the 90-day cooling-off period concludes.

• US–China-UK Trade Talks: Progress in negotiations will be critical to restoring trade flows.

• Weakening Economic Indicators: Lower business and consumer confidence could signal a slowdown.

• Corporate Earnings Pressure: Potential for reduced profits due to tariffs and weakening demand.

• Financial System Stress: Disruption of traditional investment patterns may increase systemic risk.

It’s important to note that we have appointed high-quality fund managers who are closely monitoring market conditions and making informed, strategic adjustments to your portfolios to help navigate these ongoing changes effectively.

The cycle of investor emotions

The cycle of investor emotions. Source: Russell Investments.

It’s important to keep you informed about investment concepts that help you understand how emotions may influence investment decisions.

Russell Investments has published a paper on the cycle of investor emotions; the key points are outlined below.

Investing can often be an emotional journey, as investors experience different emotions as markets rise and fall. When things are going well, we feel that nothing can stop us. And when things go bad, we look to take drastic action. Thus, emotions can pose a threat to our financial health.

The important thing is to understand these investor emotions so that you avoid falling into the trap of making emotional investment decisions.

Here is a breakdown of the typical investor emotion cycle:

• Optimism: Investors start to invest, believing the market will go up. Confidence grows as early returns are positive.

• Excitement/Thrill: Investors may start taking more risks as markets rise and returns look great.

• Euphoria: Everyone is investing as fear of missing out (FOMO) dominates, despite prices being very high and the market reaching peak levels. This is the riskiest time to invest.

• Anxiety: Investors start questioning decisions as markets stop rising or become volatile.

• Fear/Panic: Panic sets in as losses grow and investors begin to worry they made a mistake.

• Despondency: As the market bottoms out, investors sell at a loss, convinced it’s only going to get worse.

• Hope/Relief: Markets begin to recover, and some investors start cautiously reinvesting.

• Back to Optimism.

Remember to get advice before making any important financial decisions.

“The time when the markets look their worst is usually the point of maximum financial opportunity.” - Russell Investments

Global market update

United States

• The U.S. economy contracted by 0.3% in the first quarter of 2025, a sharp reversal from the 2.4% growth seen at the end of 2024. This downturn was largely driven by businesses rushing to import goods ahead of President Trump’s new tariffs, which took effect in April. The surge in imports, coupled with a decline in government spending, weighed heavily on GDP and has sparked concerns about a possible recession later in the year.

• The U.S. labour market is showing signs of weakness. The latest ADP employment report revealed that private employers added only 62,000 jobs in April, far below expectations, and forecasts suggest job growth is slowing. This, combined with negative GDP data, has heightened recession fears and may influence the Federal Reserve’s interest rate decisions.

• Stock markets have responded negatively to the uncertainty. Over the past month, U.S. stock markets have experienced heightened volatility, driven by trade policy and concerns about economic growth. After a steep early-April selloff triggered by new tariffs, major indexes like the S&P 500 and Dow Jones rebounded with their longest winning streaks in years, only to slip back into negative territory as uncertainty over tariff negotiations persisted.

New Zealand

• The OCR dropped to 3.50% on 9 April 2025. This marks its lowest level since October 2022, signaling a shift to a more accommodative monetary policy in response to rising global economic risks, such as international trade tariffs. This drop has led to lower interest rates for borrowers, making mortgages and other loans more affordable, while also reducing returns for savers. The RBNZ has indicated that further cuts are possible if global economic conditions deteriorate or if inflation and growth remain subdued, with some economists now forecasting a potential OCR low of 2.75%.

• Headline inflation reached 2.5% in Q1 2025. The main drivers were higher rents, up 3.7%, and a sharp 12.2% increase in local authority rates. Construction costs also contributed. Falling petrol prices helped offset some increases, and the proportion of goods rising more than 5% is at its lowest in four years. Inflation remains within the Reserve Bank’s 1–3% target band for the third consecutive quarter, suggesting price pressures are elevated but not yet of concern.

China

• Rising Deflationary Pressures: Consumer prices have fallen for two consecutive months, and producer prices have declined for 29 straight months, indicating weak domestic demand and entrenched deflation.

• Downgraded Growth Forecasts: Moody’s projects China’s GDP growth at 3.8% for 2025, well below the government’s 5% target, due to trade tensions and fragile consumer confidence.

Europe

• ECB Rate Cuts: The European Central Bank (ECB) lowered its key interest rates by 25 basis points in April, bringing the deposit rate to 2.25%, in response to moderating inflation and a weakening growth outlook. The ECB signalled a data-dependent approach going forward, with further cuts possible if economic conditions worsen.

• Record ETF Inflows: U.S. investors have poured record amounts into European ETFs, with $10.6 billion in inflows in Q1 2025. This shift is driven by Europe’s regulatory reforms, infrastructure spending, and relative market stability compared to the U.S., making European equities and bonds increasingly attractive.

Finally, it is important to stay the course rather than try to time the market, as markets can move quickly and unpredictably. Remaining invested or using dollar-cost averaging approaches to invest your money over a period of time, or using a goals-based strategy, can help you navigate these fluctuations more effectively.

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If you would like to discuss your current portfolio, retirement planning needs, goals-based investing approach, or any other financial planning matters please feel free to give our office a call at 09 553 8928 or email us at info@trilogyfs.co.nz.

We are always happy to help.

Sincerely,

The Team at Trilogy Financial Solutions