The first quarter of 2025 began with optimism but ended with markets in retreat amid mounting concerns over trade policy and inflation. Trade policy changes have been well telegraphed and expected, but they’re turning out to be less “watered down” than the market thought. After reaching record highs in January and February, U.S. equities closed March lower, especially in technology, as investors grappled with the implications of the Trump administration’s aggressive tariff policies targeting Canada, Mexico, China and the EU. Meanwhile, international equities have done well on increased expected government spending and reversal from a low relative valuation base.

Market Performance

• S&P 500: -4.59% for Q1
• NASDAQ: -10.42% for Q1, with tech and consumer discretionary sectors leading the decline
• Dow Jones: -1.28% for Q1
• Energy sector: Outperformed significantly, gaining over 10% YTD
• Gold: Surged nearly 20% in Q1, its best quarter since 1986, reflecting investors’ flight to safety

Economic Indicators

• Inflation: Core inflation measurements moved further from the Fed’s 2% target
• Federal funds rate: Remained steady at 4.25%-4.50%, with FOMC projecting two 25bp cuts by year-end
• Unemployment Edged up to 4.1% in February
• GDP: Q4 2024 grew at 2.4% annualized rate, with full-year 2024 growth at 2.8%
• Consumer confidence: Declined for a fourth straight month in March, falling to 92.9
• Housing: Mixed signals with existing home sales up 4.2% in February but median prices rising

What We’re Watching

Policy uncertainty has emerged as the primary market driver as we head into Q2. The potential for a global trade war looms large, with a new round of tariffs set to take effect in early April. This heightened uncertainty is already impacting consumer and business confidence.

Consumer sentiment bears close watching as one of our favorite leading indicators. The Conference Board’s Expectations Index tumbled to 65.2 in March — a 12-year low and well below the 80-point threshold that typically signals an impending recession. If this decline persists, it could portend broader economic challenges ahead.

Regarding tariffs, we remind clients that they typically cause a one-time inflation bump, but their effects can linger until nominal wages catch up to nominal price increases. This dynamic could place additional pressure on businesses and consumers already navigating uncertain economic terrain.

The Federal Reserve doesn’t meet in April, providing time to assess the impact of trade policies on inflation and growth. We’re carefully monitoring whether the economic momentum from early 2025 can withstand the current headwinds or if defensive positioning becomes more prudent.

As always, we remain committed to helping you navigate these complex market conditions with thoughtful, disciplined investment strategies.