Making Sense: March Q&A

Amy: Hi, I'm Amy Thomas, a strategist here at First Citizens Bank. Today is Monday, March 17th, 2025. I'm here with our Market and Economic Research team to talk about some of the questions we're hearing most often from clients. Phil Neuhart and Blake Taylor are going to talk about some of those things.

As always, the information you're about to hear are the views and opinions of only the authors at the time of recording and should be considered for educational purposes only.

So Phil, we've seen a lot of volatility coming into this year. You've been on the road. What kind of things are you saying to clients?

Phil: Yeah. So we certainly have seen a pickup in volatility. The market has sold off about 10% from its peak-to-trough. Contrast that with last year, which was a pretty stable year, considering that it was an election year. The max peak-to-trough drawdown was only 8.5% last year. On average, the market draws down 15% in any given year over the long-term average, so last year was pretty stable.

So we came into this year expecting an increased volatility for a few reasons. One, policy uncertainty. We have a new administration that was very clear that they were going to act, act strongly and act quickly. We are seeing that, and that is swinging markets around.

And then, additionally, we were coming off a year in which the stock market rallied 25% total return last year, especially some of the larger names were quite expensive. So expecting some volatility among those names was what we saw coming.

That said, what are we saying to clients? Well, one, we're emphasizing the importance of their financial plan if you're an individual or family. For institutions, their plan as well—usually capture it in their in their investment policy statement. It's times like this is why you have that plan, right? Remember, equities are long-term assets. They are volatile by nature. That is what you should expect from equities. That's why they're a long-term asset. Go back to your financial plan. Remind yourself why you set it that way. Make sure you have the right buckets, and carry on.

Additionally, we have emphasized for some time—including in our 2025 outlook—the importance of balance in portfolios, meaning between stocks and bonds. The expected return of stocks versus bonds is much tighter over the next decade than it was the last decade. Why is that? Stocks had an incredible prior decade. But also, yields are higher now on fixed income. Higher yields, higher expected return. So suddenly, there is an argument for balance in portfolios versus a heavy tilt towards equities, and of course that has worked so far this year.

So think about your financial plan, think about balance in portfolios and look through the near term to the long term, which is where most of our clients sit, is really focused on the long term.

Amy: And Blake, we've talked a lot about uncertainty and how that should be navigated. Can you talk a little bit about that?

Blake: Yeah. Uncertainty is difficult for any decision-maker, but it's always a factor. And yes, it is more elevated today with policy uncertainty near historic levels and tariff policy changing day to day and potentially reaching the highest level in a few decades. So that could be very difficult to navigate.

But I think it's important to balance heightened uncertainty with what you were saying, Phil, which is some of these more fundamental factors.

Phil: Right.

Blake: So is uncertainty elevated? Yes. And that does make it difficult for investors, for businesses and for households who might de-risk to some extent. A business might curtail some hiring plans or pull back an investment. Households might pull back on some discretionary spending. But when I think about uncertainty, I also try to balance that with where are things still today. And I would point out that—take corporate earnings. Have they been revised down a little bit? Yes. Are they still at a healthy level? They are, the expectations.

What about on the economic side? Has the unemployment rate moved up a little bit? It has. But it's still near generational lows.

So when things are uncomfortable around uncertainty, I think it's important to always come back and look at where we are today. And that picture is more uncertain, yes, but also still fairly healthy.

Phil: It's certainly coming from a place of strength, absolutely, into this period.

Amy: So Phil, going back to your time on the road, are you getting the sense from people that this time feels different?

Phil: It really depends on the client, to be honest with you. One thing that does feel different in terms of questions we're getting on the road is this drawdown has been very policy oriented, meaning we're looking to Washington.

Often drawdowns, you might be looking to Washington, but it's the Federal Reserve building, right? The Fed policy. You might be looking at a disappointing earnings season or just deteriorating fundamentals from an economic perspective. That's really not what this has been. This has been news and headlines coming out of Washington—by the way, some of which have been put in place, a lot have not.

So a lot of this has to do with animal spirits and the multiple you're willing to put on a dollar of earnings. What we remind clients is—almost in all drawdowns, we hear this time is different. Why is that? That is human nature.

When the market loses value, it is human nature to say, well, this time is different. Well, the truth is, as we already said, equities are a volatile asset class. A 10% drawdown in equities is not outside the norm. There are many, many examples of that.

The real question is, how do you react? And try not to react, of course, emotionally, and stick to your plan.

Amy: And, Blake, with everything we just talked about, it's easy to forget that there's an FOMC meeting this week. The Fed is going to release their summary of economic projections. What will you be looking for?

Blake: Well, the first thing is what's the policy decision going to be, and the market is pretty much unanimously expecting the Fed to stay on hold, on the sidelines.

So instead, what investors will be looking for is what's the expectation for the rest of this year and maybe even beyond. And the big question there is, how is the Fed going to engage or interact with this heightened uncertainty and specifically around the tariffs.

So I think the consensus right now is that these tariffs are likely to have downside effects on three things that the Fed cares about, and that's inflation—I think the view out there is for the most part that tariffs could push prices higher—second, on the unemployment front, that uncertainty and perhaps weaker earnings might lead to higher unemployment, and then third, all that feeds into growth. And if growth is weaker than the Fed is going to be looking to, how can they come in and support the economy?

And those things are kind of all moving in different directions. So investors will be looking for the answer of—if the economy takes a slight turn to the downside, will the Fed come in to support? And the key question there is, what happens if inflation is still is still too high? Inflation is supposed to be running at 2%. That's the Fed's objective. It's running today closer to 2.8% or even 3%.

Phil: Right.

Blake: So what I think we'll be watching for is characterization from policymakers and their projections, as you said, and from the Chair Powell's comments on how he's thinking about balancing these competing priorities.

Phil: That's right. And the summary of economic projections is always interesting. It's that communication tool to express Fed views of where inflation and employment might be going.

Another thing that we have noticed is that the market is pricing more Fed cuts. If you look earlier this year, expectation was one-and-a-half, roughly, quarter-point cuts this year—meaning very few. That has moved to two-and-a-half. Well, why is that? That's because there's some concerns around growth, right? That is a fundamental concern. The truth is futures are often wrong. What is very clear today is that the Fed is on hold and is very much in a wait-and-see mode.

Blake: Yeah. I think it's a great opportunity to again come back and talk about the difference between forecasting and predicting, and assessing the current state. And the Fed and investors and forecasters have perpetually been wrong about the unemployment and the inflation outlook. And that's always going to be the case, so we need to balance that with how are things actually today. And inflation is a little bit too high. Unemployment is a little bit elevated, but it is at a solid, healthy lower rate.

Phil: Compared to history, it's still very low.

Blake: So the market might be expecting the Fed to come in later this year with two to three interest rate cuts. But at the moment, things still are going fairly well, which is why it's important to be following month to month how are these fundamentals progressing.

Amy: Blake, Phil, thank you both so much for answering questions. We hope you found this information helpful. For more information, visit FirstCitizens.com/Wealth.

Making Sense

Your trusted source for market and economic information

Webinars | Join us at the end of each month for an in-depth discussion, Q&A included.

In Brief | Outlook for the week ahead in 90 seconds.

Q&A Videos | Answers to top questions from clients.

Breaking Financial News | Topical, market-moving events and considerations.

Brent Ciliano, SVP

Chief Investment Officer

Phillip Neuhart, SVP

Director of Market and Economic Research

Blake Taylor

Market and Economic Research Analyst

Sign up using the QR code to have these updates emailed straight to your inbox. Or visit FirstCitizens.com/Wealth to subscribe.

Authors

Phillip Neuhart | SVP, Director of Market & Economic Research

Capital Management Group | First Citizens Bank

8540 Colonnade Center Drive | Raleigh, NC 27615

Phillip.Neuhart@FirstCitizens.com | 919-716-2403

Blake Taylor | VP, Market & Economic Research Analyst

Capital Management Group | First Citizens Bank

8540 Colonnade Center Drive | Raleigh, NC 27615

Blake.Taylor@FirstCitizens.com | 919.716.7964

Important Disclosures

This material is for informational purposes only and is not intended to be an offer, specific investment strategy, recommendation or solicitation to purchase or sell any security or insurance product, and should not be construed as legal, tax or accounting advice. Please consult with your legal or tax advisor regarding the particular facts and circumstances of your situation prior to making any financial decision. While we believe that the information presented is from reliable sources, we do not represent, warrant or guarantee that it is accurate or complete.

Your investments in securities and insurance products and services are not insured by the FDIC or any other federal government agency and may lose value.  They are not deposits or other obligations of, or guaranteed by any bank or bank affiliate and are subject to investment risks, including possible loss of the principal amounts invested.

About the Entities, Brands and Services Offered: First Citizens Wealth™ (FCW) is a marketing brand of First Citizens BancShares, Inc., a bank holding company. The following affiliates of First Citizens BancShares are the entities through which FCW products are offered. Brokerage products and services are offered through First Citizens Investor Services, Inc. ("FCIS"), a registered broker-dealer, Member FINRA and SIPC. Advisory services are offered through FCIS, First Citizens Asset Management, Inc. and SVB Wealth LLC, all SEC-registered investment advisors. Certain brokerage and advisory products and services may not be available from all investment professionals, in all jurisdictions or to all investors. Insurance products and services are offered through FCIS, a licensed insurance agency. Banking, lending, trust products and services, and certain insurance products and services are offered by First-Citizens Bank & Trust Company, Member FDIC, and an Equal Housing Lender, and SVB, a division of First-Citizens Bank & Trust Company. icon: sys-ehl

FirstCitizens.com/Wealth/Disclosures