GW&K Investment Review 1Q 2025

ECONOMIC COMMENTARY

Investing today requires some fundamental beliefs. First and foremost, is confidence in our system and the conviction that the entrepreneurial spirit is alive and well. Another, is the idea that capitalism itself provides the basic tools for innovation, creativity, and change.

How will President Trump’s announced tariffs affect all this? Will they lead to stagnation or even a mild recession? Anything is possible, and as of this writing, the markets are down 10% – 20% in response. But it would be foolish to predict the short- or even intermediate-term impact on valuations because there’s no way to know if markets have properly discounted the impact of this new reality. Remember, in the post-World War II world, these types of corrections have always provided buying opportunities.

Our basic premise is the stock market provides investors with access to a changing world. Investing in great companies will always be a winning formula. At times, the market may feel fully valued or even overvalued. But our portfolio managers only buy companies that they believe will provide reasonable rates of return. To measure that in days, months, or even a year, is impossible. But for a full cycle, it has worked. What we do know is that if you are out of the stock market, even for only a few days in a cycle, you can lose a significant part of the return. If you are trying to time the market, you are engaging in speculation, not investing.

The other leg of our portfolio is investing in taxable and tax-exempt bonds. Evaluating the investment thesis for bonds is quite different than for stocks. Bonds provide predictable cash flow. A healthy allocation was the mainstay of our investment approach until 2020, when interest rates plummeted during the onset of the Covid pandemic. The 10-year Treasury yield spent most of that year treading under 1%. For client portfolios weighted heavily toward fixed income, we began to complement bond allotments with stocks that provided attractive dividends.

As we have seen, short- and long-term interest rates have risen over the last four-plus years and most of the discussions are now centered around Federal Reserve policy—and more specifically, when, or if, they will reduce interest rates in the face of unacceptable levels of inflation. There are many parts of the economy hoping that rates decline, but there is a silver lining to yields remaining where they are: bond investors finally have the opportunity to enjoy attractive returns.

A quick history on the yield of 10-year Treasury bonds—it was way back in 2000 that bond yields hovered around 6%, and for the next 20 years, rates fell steadily, averaging around 3.5%. After dipping under 1% in 2020 and treading water for two years, rates shot higher in 2022, in response to inflationary fears that had been dormant for decades. By 2023, yields on the 10-year Treasury had climbed to 5%. So, in just three years, yields jumped from 1% to 5%, causing a major decline in bond values.

So where are we now? 10-year Treasury yields are 4.25% and tax-exempt yields are 3.30%—not at their peaks, but far more appealing than it has been for most of the last 25 years. With growth easing, there is little risk that rates will rise markedly from here, so bonds should continue to complement other more aggressive parts of your portfolio.

The lesson is timeless: diversify your assets. In a well- balanced and healthy portfolio, when certain areas underperform, others are positioned to do well. But over the investment cycle of five to 10 years, it is amazing how they all find their footing.