The Economy
In the fourth quarter of 2024, real Gross Domestic Product (GDP) rose at an annualized pace of 2.4%. (1Q2025 GDP will be released on April 30.) This was a slight decrease from the prior quarter when real GDP rose 3.1%. Increases in consumer and government spending contributed to growth. A decrease in investments detracted from fourth-quarter GDP growth.
In employment news, nonfarm payrolls increased by 228,000 in March, and the unemployment rate is 4.2%. Wages grew at an annual rate of 3.8% through March 2025. Inflation softened in March, with the Consumer Price Index (CPI) at 2.4%, annualized over the preceding 12 months. Core CPI, excluding food and energy, the Federal Reserve’s preferred measure of inflation, was slightly higher at 2.8% for the same period.
On April 2, the Trump Administration announced new tariffs affecting trade with over 70 countries. While tariffs excluding China, Mexico, and Canada were paused until July 8, there are concerns that increases in the cost of trade will slow down the U.S. economy.
Fixed Income Markets
In the first quarter, fixed income returns were positive as the broad bond market index, the Bloomberg U.S. Aggregate Bond Index, returned 2.8%. As of March 31, the 2-year Treasury yield was 3.89%; the yield on five- and ten-year maturities stood at 3.96% and 4.23%, respectively. The yield on 30-year Treasuries was 4.59%. The yield curve continued to normalize this quarter, with 10- and 30-year U.S. Treasury yields higher than 2-year yields. However, the yield curve is still inverted with cash yields at 4.3% at quarter end.
For the quarter, all fixed income sectors posted gains, led by Treasury Inflation-Protected Securities (TIPS), up 4.2%, and Long Government/Credit, up 3.6%. However, bond prices have dipped since quarter-end, responding to economic uncertainty. Given budget negotiations ongoing in Congress, growing concerns about the Federal deficit and debt service are also impacting bond markets.
After 1.0% of rate cuts in late 2024, the Federal Reserve held rates steady in the range of 4.25% to 4.5% in the first quarter, as Core inflation remains stubbornly high. The possibility of a global trade war has introduced new uncertainty regarding future Fed activity. While inflation softened in the first quarter, that was before extraordinary tariffs were imposed on Chinese goods, and a 10% base tariff remained on all other trade partners. Analysts are unsure if the Fed will view any tariff-related hike in inflation as transitory “noise” or be forced to hold or even raise rates later this year to counter higher inflation.
U.S. Equities Markets
The S&P 500® Index was down 4.3% for the first quarter. There was a wide dispersion of returns among sectors during the quarter as four sectors saw declines and seven sectors rose. Energy, up 10.2%, and Healthcare, up 6.5%, were the best performing sectors; Consumer Discretionary, down 13.8%, and Technology, down 12.7%, were the worst performing sectors.
Footnote to image: Returns by Sector are represented by the S&P 500® Index sector total return indices.
Along the size and style spectrum, smaller capitalization and growth investment style were out of favor in the first quarter. Large value posted the lone positive return (+2.1%) along the size and style spectrum. On the opposite end, small growth declined 11.1%.
April 2 saw the announcement of broad global tariffs; April 9 saw most tariffs suspended until July 8. The tariffs impacted a much broader range of countries and were much higher than markets expected. Markets were sharply down at the announcement. Despite a brief rally on April 9, markets continue to be down for the year-to-date[1].
International Markets
International developed and emerging markets saw gains for the quarter. Developed international markets, represented by the MSCI World Ex USA Index, were up 6.3%, and emerging markets, represented by the MSCI Emerging Markets Index, were up 3.0%. Despite the lower returns on emerging markets broadly, EM Latin America outperformed all regions with a return of 12.8%. The lowest regional returns were found in Japan and the Pacific, both up 0.5%.
Concern is growing about the possibility of a slowdown in growth as the U.S., a major trade partner globally, continues to negotiate new trade rules.
Outlook
The University of Michigan released the results of their preliminary April Surveys of Consumers on April 11. This gauge was sharply down, closing in on the lowest measure since mid-2022. Consumers were contemplating the potential effects of a trade war on inflation and anticipating a worsening labor market. The University of Michigan notes that the Survey was conducted March 25 through April 8, the day before the announcement that most tariffs would be suspended for 90 days.
Source: The University of Michigan Surveys of Consumers, April 11, 2025 release
Source: The University of Michigan Surveys of Consumers, April 11, 2025 release
On-again and off-again tariff announcements are preceding sharp swings in the markets. This has added to volatility, hurt stock prices, and spooked the bond market. This is not the first global market shock in our lifetimes, and we’ve observed that markets are resilient over the long term. However, timing the recovery is challenging when markets are driven by headlines and fear.
Notes:
[1] Data as of market close on April 10, 2025.
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