Market Commentary – April 2025

Plenty to Unpack from the First Quarter 

The first quarter gave financial professionals and investors plenty to digest. As we head into the second quarter, we’re keeping a close eye on several key themes that are shaping the investment landscape: 

• Year-to-date market performance and the role of uncertainty coming out of Washington 

• How the latest market pullback compares to past corrections 

• Why the 2025 bond market feels different from what we saw between 2022 and 2024 

• Tariffs: political posturing or meaningful policy shift?  

• Government spending and the long road to fiscal discipline 

• The labor market: a tale of two data sets 

• How politics continue to shape economic expectations 

Markets End the Quarter “Tariff-ied” 

Markets started the year on a strong note, with the S&P 500 reaching yet another all-time high on February 19th. However, enthusiasm eventually gave way to renewed concerns around trade, debt, and mixed policy signals out of Washington. Suggestions from the White House that short-term economic pain—or even a mild recession—might be a worthwhile tradeoff for long-term strategic gains left investors wary. Profit-taking ensued.  

Stocks tend to experience a 10% or greater drawdown roughly every one to two years. The last correction occurred in the fall of 2023, so by historical standards, this pullback is part of the natural rhythm of market cycles. That doesn’t make it enjoyable, but it does make it expected.  Since 1950, this was tied for the 6th fastest 10% correction on record (20 days).  Similar corrections resulted in positive returns over the following 12 months 100% of the time with an average return of 20% (Fund Strat research).   

While the catalysts for pullbacks vary, the underlying mechanics are often the same. A strong bull market can stretch valuations beyond fundamentals, eventually creating a vulnerability to any unsettling headline. At that point, even rational policy discussions can become a reason to take profits. These resets help restore balance between price and value. They’re healthy, even if they don’t feel that way.

A Mild Correction, But Volatility Likely Until Uncertainty Recedes

The most recent pullback was mild by historical standards. What hasn’t been mild is the pace and unpredictability of economic policy shifts—especially around trade.

Odds of a recession have increased somewhat, not necessarily because of deteriorating economic data, but due to uncertainty itself. When policy signals are unclear or erratic, businesses tend to slow hiring and investment. Consumers, unsure about the future, may scale back spending. That softening of confidence can become a self-fulfilling prophecy.

The administration has floated a broad set of objectives: restructuring trade agreements, reducing deficits, supporting the U.S. dollar, making the Tax Cuts and Jobs Act permanent, and reshaping the bond market through regulatory change. The goals are ambitious—but the execution has, at times, appeared disorganized.

The Bond Market Provides the Buffer We’ve Lacked for Three Years

For the first time in several years, bonds are once again providing the diversification benefit that many portfolios had been missing. After a long stretch of elevated interest rate volatility and negative returns in fixed income, year-to-date bond performance has been positive as of the end of the quarter.

The Bloomberg U.S. Aggregate Bond Index—a broad measure of investment-grade debt—has returned approximately 2.54%, helping to offset recent equity market weakness. Treasury bonds especially benefited, as investors seeking safety were encouraged by indications the Federal Reserve would likely reduce interest rates later in the year. Currently, there is a 70% chance that the Fed reduces rates by 75 basis points, or 0.75% by December according to CME Group.  

Notably, intermediate- and longer-term yields declined modestly during the quarter, reflecting both moderating inflation and expectations for slower growth. That dynamic allowed bond prices to rise, giving portfolios a smoother ride during equity market turbulence.

While we don’t expect a repeat of the ultra-low interest rate environment of the 2010s, we are encouraged by the re-emergence of bonds as a viable source of both income and stability in diversified portfolios.

The Tariff Agenda

One major area of focus has been tariffs. The goal? Reorder global trade to better benefit the U.S.  We import more than $1.2 trillion of goods from other countries.  This can reduce the cost of items we purchase but it also detracts from U.S. economic output as calculated by Gross Domestic Product (GDP). The administration aims to onshore more manufacturing to reduce reliance on other countries, create more U.S. jobs and produce critical items such as semiconductor chips.  Tariffs are also being employed to target currency manipulation whereby countries (“unfairly”) reduce the value of their currency to make it cheaper for other countries to buy their good Whether voters (and markets) have the patience for such a strategy is another matter. Bringing manufacturing jobs back to the U.S. enjoys broad support in theory—but not everyone is willing to endure economic discomfort in the short-term for a potential long-term benefit.

**UPDATE FROM 4/3/25 FOLLOWING PRESIDENT TRUMP’S TARIFF ANNOUNCMENTS/COMMENTS:**

“Liberation Day” arrived on April 2 when President Trump announced a minimum reciprocal tariff of 10% on countries that impose a tax, tariff, VAT (Value Added Tax), or combination of all three on U.S. goods. Several countries will be charged approximately one-half of what is imposed on the U.S.  China is near the top at 34%. However, the arithmetic used by the administration is seemingly not based on these “taxes” from other countries but on U.S. trade deficits. The resulting numbers are a list of tariffs that appear unrealistic and unsustainable over time.

We have to surmise that the administration is using this to drive negotiations related to the goals outlined above. While we have more clarity on the tariff amounts, this creates more uncertainty about the economic impact. At the time of this writing, the market indices are down considerably.  The imposition of tariffs begins on April 9th, providing a week for negotiations to begin. However, we anticipate continually changing headlines that will result in higher-than-average market volatility. 

Government Spending: A Growing Burden

Another theme getting more attention is the sheer size of the federal government. Excluding defense spending, the federal government represented just 7% of GDP in the 1950s. That figure rose to 10% in the 1960s, 14% in the 1970s, and stabilized through the ’80s and ’90s. Today, non-defense government spending averages 23% of GDP—more than triple its 1950s level.  Every dollar spent by the government originates in the private sector. As government spending grows, it inevitably shifts resources away from private enterprise, potentially slowing innovation and productivity. That tradeoff is becoming harder to ignore.

What’s the Plan?

The administration has outlined several policy goals:

• Tariffs: Adjusting trade policy to reduce reliance on China and bolster U.S. competitiveness.
• Debt & Deficits: Roughly $3 trillion in debt—about 10% of total outstanding U.S. debt—must be refinanced in 2025, and at much higher interest rates. Treasury Secretary Scott Bessent has emphasized gradual deficit reduction to avoid derailing growth, with a goal of shrinking the fiscal deficit to 3% of GDP over time.
• Bond Yields and the Dollar: By easing regulatory constraints like the Supplementary Leverage Ratio (SLR), the administration hopes to drive down Treasury yields and reduce the cost of servicing the $32 trillion national debt. A weaker U.S. dollar also makes American exports more competitive.
• Taxes: Making the 2017 Tax Cuts and Jobs Act permanent remains a priority, but the timeline and likelihood of passage are still uncertain.

Markets are watching these efforts closely.  Moderate progress may be welcomed, but unclear or conflicting signals have contributed to recent volatility.

Labor Market: A Confusing Picture

With so much concern expressed by the media, one of the disconnects so far this year has been between “soft” and “hard” labor market data. Consumer confidence surveys, like the Conference Board’s, show rising concern. Expectations for future job availability have fallen to 12-year lows.  Yet the actual labor market remains solid. 

The unemployment rate is low, and for every unemployed American, there are 1.1 job openings. The percentage of survey respondents saying jobs are “hard to find” remains far below recessionary levels. It’s a classic case of what people say versus what they do. Why does labor matter?  If people are working (and confident of their employment), they are spending.  Consumer spending is 68% of the U.S. economy. 

Sentiment: The Market Wall of Worry

Investor sentiment has shifted sharply. In just one month, the percentage of investors who expect stock prices to fall rose from 22% to 45%. That kind of move is typically associated with recession fears or bear markets.  The AAII bull/bear investor sentiment survey also approached pessimistic extremes with nearly 60% respondents holding a negative outlook over the following 6 months as of March 12, 2025.  

Investors positioning for stock prices to fall versus rise (put-call ratio) rose to extreme levels on March 13, 2025.  Historically, such high levels of pessimism tend to precede market rebounds, not declines. With no imminent signs of recession, these levels of negativity may be a contrarian positive for markets going forward. 

You’re Both Wrong 

We continue to see economic expectations divided along partisan lines. As the chart below shows, Republicans and Democrats both misjudged the direction of inflation depending on whether “their side” was in power.  When politics shape economic expectations, neither side gets it right. The actual outcome often lands somewhere in the middle—less dramatic than either party’s narrative. That’s likely to be the case with trade policy, inflation, and interest rates in the months ahead. 

Looking Ahead

Markets dislike uncertainty—and there’s plenty to go around!  But uncertainty isn’t the same as crisis. Regardless of tariff policy headlines, the recent pullback is healthy as the S&P 500 index valuation (P/E multiple) was meaningfully above its historical average.  Economic fundamentals remain stable, and corporate earnings are holding up well. A mild correction, while uncomfortable, is part of the investment journey.  Permanent tariffs will create a one-time adjustment that will increase prices for goods affected.  In response, consumers can and will find substitutions where possible.

We remain cautiously optimistic as we move forward. Headlines often tell only part of the story, and the underlying data frequently paints a more nuanced picture. As always, we’re closely tracking developments in fiscal policy, trade, and consumer sentiment, and we’ll make thoughtful adjustments as needed. In the meantime, we continue to encourage clients to stay diversified, remain disciplined, and keep their focus on long-term goals.

As always, thank you for your trust and partnership.

Chris Proctor, CIMA®

Chief Investment Officer