Q1 2025 Market Observations

The excitement after the election didn’t last long. Now, the stock market is feeling nervous. There’s talk about Tariffs, slower growth, and continued geopolitical conflicts around the globe. All this uncertainty is making investors worry – and markets don’t like worry.

Given the recent turmoil, I think it is important to remember that real, hard economic data has often yet to confirm the worry that is being priced into the markets. We are watching closely as earnings season kicks off and economic data begins to roll out either confirming or contradicting current market behavior.

Growth and Inflation: Are we slowing down?

According to the Atlanta Fed, the US economy may have shrunk a little during the first quarter of 2025 (down about -2.80% annualized). That’s not great, but we’ll get the official number from the Bureau of Economic Analysis (BEA) at the end of April.

People are also worrying that inflation will stay elevated due to tariffs. This is illustrated through University of Michigan: Inflation Expectations survey. However, market-based inflation expectations are actually lower than they were in January with a slight uptick last week. The CPI inflation report on Thursday showed slightly lower core inflation, 2.80% versus 3.0% expected. This will be worth paying close attention to as trade policy makes its way in market pricing over the next several months.

Bonds: Feeling stressed

High Yield Spreads:

The bond market is also reacting. High yield spreads have widened by almost 200 basis points in the last two and a half months. Investors appear more nervous, showing apprehension towards credit risk.

Municipal Bonds: lagging behind

Municipal bonds haven’t performed great either. A mix of seasonality (tax season), uncertainty about future tax rules, liquidity demands and a rush of new issue supply has weighed them down. This kind of relative underperformance is rare indeed, it only happened during big events like COVID or the 2008 financial crisis. We view this sell-off in Munis as an opportunity.

Treasury Yields: A wild ride

At the start of the year, the 10-year Treasury yield was 4.57%. It jumped up to 4.80%, then fell back down to 3.88% and now it’s back around 4.50%. That’s a lot of movement in a short time!

Why the swings?

• People are unsure about tariffs and whether countries like China will buy less US debt

• The US Government is spending a lot, which could lead to more debt sales

• Tariffs can be interpreted as inflationary, pushing interest rates higher

• Big hedge funds are unwinding complex “basis trades”, which can make markets more volatile

Equity Markets:

Stocks have taken a hit:

• S&P 500 is down about 10%

• The tech-heavy NASDAQ is down about 13%, briefly entering “Bear” market territory

Surprisingly, stocks in international developed markets are doing much better than US stocks so far this year. Will a reset of global trade and relative cheapness be enough to attract money flow back into developed market equities at the expense of domestic stocks?

Style Factor Tilts: What’s working, what’s not

During the first few months of 2025, Value stocks and Low-volatility stocks outperformed the S&P 500. Smaller companies and the ‘reigning’ champions - MAG 7 Mega Growth stocks, have fallen behind.

Commodities: Mixed signals

Oil dropped a lot – it’s now around $60 a barrel, after briefly touches $55 earlier this week. It is down about 16% so far this year.

Gold, on the other hand, is as shiny as ever! It’s up 20% this year, and over 30% over the last 12 months.

Summary

Despite the bounce on Wednesday, recession worries are still top of mind. First quarter GDP growth looks to be negative, and if company profits start falling too, that could mean slower demand, fewer jobs, and more volatility ahead.

We are keeping a close eye on:

• Bonds markets: HY spreads & the yield curve

• Consumer sentiment

• Job market trends

• Stock market behavior

What should investors do?

Markets drop 15%-20% about once every 2 to 4 years, it’s part of normal investing. Bigger crashes, (30%+ or more) occur less often, around every 7 to 10 years.

If that kind of movement feels scary, it might be time to reassess how much you have in stocks. Try to avoid rushed decisions. A well-built portfolio should help you stay calm and sleep at night, even when markets are rocky. A review of your portfolio’s alignment with your overall goals might be a worthy action to take before making any knee-jerk decisions. If this pullback feels like a chance to invest more, make sure you have a plan and some extra cash ready. Buying dips can pay off in the long run, but only if it fits your goals and comfort levels.

If you’d like to talk more about your investments or our strategy, feel free to reach out. We’re always here to help.

Note: As I finished drafting this blog post on Wednesday, stock markets posted their largest jump in years after Trump temporarily paused tariffs on non-retaliating countries and escalated tariffs on China. It goes to show you how fast things can change. One minute, I’m writing about potential recessions and before lunch, the market jumps over 9% on a Trump tweet. Stocks resumed their pessimistic outlook on Thursday. This is such a great lesson – volatility clusters. Big up days happen most often during big down days, and it is nearly impossible to predict either.

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Sources:

Federal Reserve Bank of St. Louis. (n.d.). FRED Economic Data. St. Louis FRED Economic Database. https://www.stlouisfed.org/

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Disclosures:

This content has been prepared for informational purposes only and should not be considered as investment, tax, or legal advice. We recommend all investors to consult with a financial and/or tax advisor regarding their individual circumstances before taking investment decisions.

Investing in bonds exposes the investor to the risk of loss of principal. Lower and non-rated securities are more volatile and less liquid than investment grade bonds.

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