Quarterly Market Commentary – Mosaic Model Portfolios


Quarterly Market Commentary – Mosaic Model Portfolios


In their quarterly update, the Multi-Asset portfolio team at Madison Investments discusses the events of the quarter, and provides an outlook for the markets moving forward.

Market Recap – First Quarter 2025

The script was completely flipped during the first three months of 2025. The so-called “Magnificent 7” U.S. mega cap growth stocks behind the S&P 500 Index’s meteoric rise off the 2022 low, were promptly sent from the penthouse to the outhouse, taking the S&P 500 Index down -4.3% for the quarter. Fortunately, the index decline was as narrow as its prior advance and outside of the Mag-7 world, seven of the eleven S&P sectors provided positive returns. Value stocks also generated gains, with the Russell 1000 Value Index up +2.1% versus a steep -10.0% decline from the tech heavy Russell 1000 Growth Index.


The quarter was marked by two distinct events that brought serious questions to investors’ minds. First, was the release of the DeepSeek-R1 AI model in China in late January. The model was purportedly created at a mere fraction of the existing AI models in the United States, brining into question the hundreds of billions being spent on AI capital expenditures by the large U.S. firms, who coincidentally, are still looking for a road to realize any material revenue from said AI spending. Then, with ongoing tariff talk causing rising uncertainty among businesses and consumers alike, in an early March interview, President Trump declined to rule out a recession and spoke of a “period of transition” as his policies play out. Investors were instantly unnerved at the prospect of the Administration playing a game of chicken with the economy and our global trading partners.


As bad as things felt domestically, the perennially underperforming international equity markets caught a bid. The broad market MSCI ACWI ex-US Index returned +5.2%, outperforming the S&P by nearly 10%. Eurozone stocks were already performing well when Germany, the bastion of fiscal rectitude, put forth a fiscal stimulus package aimed at infrastructure and defense. The proposed package was seen as a green light for the entire Eurozone to open the fiscal spigot to support the economy. Chinese stocks also performed well, up 15.0%, as investors continue to expect more fiscal policy ease to counter Trump 2.0’s trade war.


Turning to fixed income, bonds did well and provided refuge from stocks as interest rates fell during the quarter due to concerns of an economic growth scare associated with the trade war and waning confidence. The Bloomberg U.S. Aggregate Bond Index returned a respectable +2.8%, led by U.S. Treasuries and mortgage-backed securities.

 

Performance

Despite being offsides this quarter with our preference for U.S. over international equities, a significant headwind given the 10% performance differential between the MSCI ACWI ex-US and Russell 3000 Indexes, portfolios performed very well, especially in portfolios that utilize a higher proportion of ETFs.


Within U.S. equities, our below- market Mag-7 exposure was a huge help, as was our preference for high quality stocks and an overweight to the outperforming energy sector, which was up 10.2%. Small cap stocks struggled over the quarter and our overweight allocation detracted from returns.


Internationally, the headwind generated by our underweight stance was mitigated by outsized returns in our more Europe heavy holdings. Despite the big returns from China, our EM Asia position detracted from performance, as did our overweight to Japan. 


Fixed income allocations benefited from our sizable overweight to mortgage-backed securities and U.S. Treasuries versus corporate bonds, which effectively neutralized our more modest relative duration positioning. 

 

Outlook & Positioning

We entered the year cautiously optimistic based on vastly improved small business sentiment and the outlook for deregulation. However, with inflation remaining sticky and the Administration’s penchant for tariffs, uncertainty and confidence have reverted all the way back near pre-election levels. We were of the mind that much of the Administration’s initial tariff talk was posturing to extract concessions and policy goals, but as the quarter wore on the approach took on a more reckless tone. Confidence is fickle and uncertainty is anathema to businesses and consumers. Stoking uncertainty and eroding confidence greatly increases the risk of recession. High frequency economic data have clearly been clouded by the front running of tariffs, and it’s highly likely that 1Q 2025 real GDP growth will be negative. That said, we remain encouraged by the relative calm of the credit markets, where spreads have widened, but are not alarming. The labor market and consumer spending have cooled but remain stable. The first months of the second quarter will be critical in determining where we are heading. If agreements can be reached on trade, the markets will likely look to the positive aspects of deregulation and tax policy, creating a more favorable business climate over the back half of the year. However, if the trade war escalates and businesses and consumers retreat into preservation mode, recession is a distinct possibility. We are comfortable with our current level of portfolio defense via our minor equity underweight and tilt toward high quality within both stocks and bonds, but stand ready to increase measures should the situation deteriorate.


We truly appreciate your confidence and partnership.

“Madison” and/or “Madison Investments” is the unifying tradename of Madison Investment Holdings, Inc., Madison Asset Management, LLC (“MAM”), and Madison Investment Advisors, LLC (“MIA”). MAM and MIA are registered as investment advisers with the U.S. Securities and Exchange Commission. Madison Funds are distributed by MFD Distributor, LLC. MFD Distributor, LLC is registered with the U.S. Securities and Exchange Commission as a broker-dealer and is a member firm of the Financial Industry Regulatory Authority. The home office for each firm listed above is 550 Science Drive, Madison, WI 53711. Madison’s toll-free number is 800-767-0300.

Any performance data shown represents past performance. Past performance is no guarantee of future results.

Non-deposit investment products are not federally insured, involve investment risk, may lose value and are not obligations of, or guaranteed by, any financial institution. Investment returns and principal value will fluctuate.

This website is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security and is not investment advice.

Upon request, Madison may furnish to the client or institution a list of all security recommendations made within the past year.

Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only, and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance.

The S&P 500® is an unmanaged index of large companies and is widely regarded as a standard for measuring large-cap and mid-cap U.S. stock-market performance. Results assume the reinvestment of all capital gain and dividend distributions. An investment cannot be made directly into an index.

Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group.

The Russell 2000 Index measures the performance of the 2,000 smallest companies in the Russell 3000® Index, which represents approximately 11% of the total market capitalization of the Russell 3000® Index.

The Russell 1000® Growth Index is designed to track those securities within the broader Russell 1000 Index that FTSE Russell has determined exhibit growth characteristics.

The Russell 1000® Value Index is designed to track those securities within the broader Russell 1000 Index that FTSE Russell has determined exhibit value characteristics.

The MSCI ACWI ex-USA Index captures large and mid cap representation across 22 of 23 Developed Markets countries (excl. the US) and 23 Emerging Markets countries. With 1,843 constituents, the index covers approximately 85% of the global equity opportunity set outside the US.

Bloomberg U.S. Aggregate Bond Index is an unmanaged index of U.S. fixed income securities. The U.S. Aggregate Index covers the USD-denominated, investment-grade, fixed-rate, taxable bond market of SEC-registered securities. The index includes bonds from the Treasury, Government-Related, Corporate, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS sectors.

International equities involve risks of economic and political instability, market liquidity, currency volatility and differences in accounting standards.

Yield Curve is a line that plots yields (interest rates) of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of future interest rate changes and economic activity. There are three main types of yield curve shapes: normal (upward sloping curve), inverted (downward sloping curve) and flat.

The Magnificent Seven stocks are a group of high-performing and influential companies in the U.S. stock market: Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA, and Tesla.

Diversification does not assure a profit or protect against loss in a declining market.

Each portfolio is subject to the risks and expenses of the underlying funds in direct proportion to the allocation of assets among the underlying funds.

Please consult with your financial advisor to determine your risk tolerance and investment objectives. While Madison constructs portfolios for various risk tolerances, its Asset Allocation Team does not determine individual client’s risk tolerance or investment objectives.

All investing involves risks including the possible loss of principal. There can be no assurance the asset allocation portfolios will achieve their investment objectives. The portfolios may invest in equities which are subject to market volatility. In addition to the general risk of investing, the portfolio is subject to additional risks including investing in bond and debt securities, which includes credit risk, prepayment risk and interest rate risk. When interest rates rise, bond prices generally fall. Securities rated below investment grade are more sensitive to economic, political and adverse development changes. International equities involve risks of economic and political instability, market liquidity, currency volatility and differences in accounting standards.

Holdings may vary depending on account inception date, objective, cash flows, market volatility, and other variables. Any securities identified and described herein do not represent all of the securities purchased or sold, and these securities may not be purchased for a new account. Past performance does not guarantee future results. There is no guarantee that any securities transactions identified and described herein were, or will be profitable.

Although the information in this report has been obtained from sources that the firm believes to be reliable, we do not guarantee its accuracy, and any such information may be incomplete or condensed. All opinions included in the report constitute the authors’ judgment as of the date of this report and are subject to change without notice. This report is for informational purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.