April 16, 2025
As the first quarter of 2025 draws to a close, what started in February as investment uncertainty has now morphed into a prevailing market narrative. A combination of weakening economic data, escalating geopolitical tensions, and heightened policy uncertainty has led to a reversal of the so-called “Trump trade,” resulting in increased market volatility, a decline in U.S. Treasury yields, and a correction in U.S. equity markets.Throughout March tariff-related headlines buffeted US equity markets, as investor focus turned to April 2, the so called “Liberation Day” by President Trump where he pledged to announce formal tariff measures. Overall, the first quarter has been one bumpy ride, and it looks unlikely the coming quarter will provide any respite. From a state of euphoria, back-to-back years of record equity market performance and US exceptionalism, markets have moved to murky environment of heightened uncertainty resulting from the unpredictable trajectory of U.S. trade policy and growth expectations. This heightened uncertainty contributed to increased volatility, a -5.6% decline in the SCP 500 Index in March, and a year-to-date and first-quarter return of -4.3%. Both consumer and business sentiment deteriorated sharply, driven primarily by concerns over tariffs and their broader economic implications. In contrast, Europe has delivered a significantly more robust fiscal response than many had anticipated. Within this environment, emerging market equities outperformed their developed market counterparts, with Chinese stocks making a significant come back. Value stocks outpaced growth stocks, while smaller-cap equities underperformed, declining by 3.6%, as escalating trade tensions fueled concerns over slowing economic growth and rising inflationary pressures. Commodities emerged as the strongest asset class over the quarter, driven by a notable 19% increase in gold prices. In fixed income markets, mounting recession risks contributed to a 2.9% return from U.S. Treasuries.
U.S. economic data has continued to show signs of deceleration and moderating growth throughout 2025. While headline employment figures remain stable, underlying labor market indicators such as quit rates, real wage growth, new hiring activity, and average weekly hours suggest potential softening, which could place upward pressure on the unemployment rate in the months ahead. Consensus expectations currently place full-year 2025 real GDP growth at approximately 2%. However, the Atlanta Fed’s GDP Now model indicates a sharp first-quarter contraction of -2.8%. An alternative model, which adjusts for distortions in trade data related to gold imports and exports, estimates a more modest decline of -0.5%. Retail sales rebounded modestly rising by 0.2% in February, falling short of the anticipated 0.6% increase. Nevertheless, the figure marked a return to positive territory following a 1.2% decline in January. February job creation fell short of expectations: The U.S. economy added 151,000 jobs in February, below the consensus estimate of 170,000, though an improvement from January’s revised total of 125,000. Inflation showed signs of easing with the Consumer Price Index (CPI) rising at an annualized rate of 2.8% in February, slightly below the projected 2.9% and down from 3.0% in January. The decline provided some relief following four consecutive months of rising inflation. Amidst these macro dynamics, the Federal Reserve opted to pause its rate-cutting cycle at the March FOMC meeting, with Chair Jerome Powell stating that the central bank is in “no hurry” to lower interest rates. While the Fed’s overall stance on monetary policy remained largely unchanged since
January, updated projections reflect a modest decline in expected GDP growth—from 2.1% to 1.7%—alongside a slight upward revision in the year-end inflation forecast, from 2.5% to 2.7%. Despite these adjustments, the Fed maintained its federal funds rate (FFR) guidance at 3.9%, signalling expectations for only two 25-basis-point cuts this calendar year. While the Fed acknowledged that the economy remains fundamentally sound, it also highlighted the growing uncertainty surrounding the outlook.
In bond markets, rising recession risks led to a return of 2.9% from US Treasuries. Yields remained largely range-bound as investors awaited greater clarity regarding the economic outlook and the direction of U.S. trade policy. The Bloomberg U.S. Aggregate Bond Index returned 0% for the month, with the 10-year U.S. Treasury yield remaining mostly stable around 4.2% levels. Movements across the yield curve were limited, reflecting expectations that the Fed will proceed cautiously in the months ahead. Heightened trade uncertainty increased demand for safe-haven assets, contributing to modest declines in two-year and five-year Treasury yields. Investment grade (IG) bonds outperformed high yield (HY) counterparts amid rising recession concerns with, A-rated IG bonds posting a modest return of -0.2%, while lower-quality CCC-rated HY bonds declined by 2.7%. As economic growth projections have weakened, investors have shown a preference for higher-quality fixed income assets, reflecting a potential decline in overall risk appetite. The credit spreads widened moderately but remained near historically low levels. The U.S. High Yield (HY) Index and the European HY Index both posted negative returns of
-1.0% and -1.1%, respectively, for the month. Market participants now anticipate that the Federal Reserve’s benchmark rate will be near 3.6% by the end of 2025, while the European rate is expected to hover around 1.8%. In Europe, expectations of much larger issuance to finance new government spending programmes weighed on sovereign bond returns, with German Bunds ending the quarter down 1.6%. Japanese government bonds were the notable underperformer, down 2.4%, as recent data emphasises building inflationary pressures.
Source: CME Fed Watch Tool. Interest Cut expectation as of 31 March ‘25
The SCP 500 Index entered correction territory in mid-March, having declined by 10% from its February 19th peak. The pullback was driven by a combination of slowing economic growth, persistent inflation, and heightened policy uncertainty. Large-cap stocks, as represented by the SCP 500 Index, declined by 5.6%, yet outperformed small-cap equities, with the Russell 2000 Index falling 6.8%. Large-cap technology companies continued to weigh on U.S. equity performance. Much of the recent downturn was concentrated in the megacap technology names that had driven gains in 2024, leaving the equal-weighted SCP 500 only modestly lower year-to- date. The weakest sectors during the month and quarter were Technology, Consumer Discretionary, and Communication Services. The “Magnificent Seven” stocks underperformed for a second consecutive month: Alphabet, Amazon, Apple, Meta, Microsoft, NVIDIA, and Tesla collectively declined by 10.2% in March, following an 8.0% decline in February. NVIDIA led the losses, falling 13.2%, likely due to concerns around export restrictions to China and a potential slowdown in demand for its AI-related semiconductors. High dividend-paying sectors outperformed amid rising volatility: Defensive, income-generating sectors such as energy and utilities outpaced growth-oriented sectors like technology and consumer discretionary, offering relative stability during a more turbulent market environment.
While U.S. equity markets are undergoing a correction following the substantial gains of the past two years, several international economies are experiencing a rebound from earlier slowdowns. Over the month, while the the MSCI World Index dropped by -4.6%, the MSCI Emerging Markets Index gained 0.4%. European stock markets retreated, with the Stoxx 600 falling -4.2% following the tariff threats. The Swiss Performance Index performed better, down -2.0%, while the Nikkei lost -4.1%. Emerging-market equities outperformed their developed market counterparts. Th policy initiatives in these markets seem to be playing their part. In China, stimulus initiatives have included wage increases for millions of government employees, expanded issuance of state and local government bonds to support the real estate sector and banking system, an extension of the consumer goods trade-in program, and a significant increase in the national budget deficit— now at its highest level since 2010. In Europe, rising fiscal expenditures are being driven in part by a renewed emphasis on national defense, amid growing uncertainty surrounding the United States’ commitment to NATO’s mutual defense obligations. Germany, in particular, has signalled a notable policy shift by proposing reforms to its long-standing debt constraints and suspending its so-called “fiscal brake.” European banks have been a key contributor to international equity performance, gaining 18% year-to-date, supported by rising loan demand and accommodative monetary policy.
Source: Y-Charts Asset Class Performance. Data as of 03/31/25
Precious metals have been the hero in these volatile times. Gold prices surged to record highs, surpassing $3,100 per ounce, marking an 18% increase in the first quarter of 2025. This rise was fueled by investor concerns over President Donald Trump’s tariff announcements, which heightened fears of inflation and economic slowdown and continued purchases by several Central Banks to reduce their dependency on the USD reserves. Silver prices too saw a modest increase in March, influenced by the broader rally in precious metals. However, the gains were less pronounced compared to gold, reflecting a more cautious investor outlook, considering the industrial demand of Silver. Crude oil prices also rebounded, with WTI rising from $69.30 to
$71.50, primarily in response to the resurgence of geopolitical risk. In currencies, the U.S. dollar continued to depreciate against most major currencies, extending a reversal following its broad- based strength throughout 2024. The dollar declined by -4.3% against the euro and -2.1% against the Swiss franc. The Japanese yen appreciated modestly (+0.4% versus the dollar), supported by expectations that the Bank of Japan will continue its gradual monetary policy normalization in the coming months.
Source: Bloomberg. Gold Price Chart (Last 1 Year Until 31st March 2025)
Source: Bloomberg. DXY (Dollar Index) Chart (Last 1 Year Until 31st March 2025)
While tariff-related headlines buffeted US equity markets throughout the first quarter, shifting expectations around the severity of pending tariff announcements due on 2 April drove swings in market sentiment. Amid this heightened uncertainty, it was unsurprising that the Federal Reserve opted to leave interest rates unchanged during the quarter and signalled a more cautious stance during the March meeting. The economic impact will depend on the breadth and scale of tariff implementation: The evolving nature of U.S. trade policy, along with potential retaliatory measures from affected nations, has introduced considerable uncertainty for global businesses.
Terms like “Stagflation”, “Soft landing” and “Recession” are back on the forefront. Q1 earnings results start soon and with the uncertainty and reducing business confidence, forward guidance may get bleaker for Corporates which may in turn impact equity markets. Having said that should tariff-related tensions ease in the coming months, potential regulatory and tax relief could serve as a catalyst for stronger economic growth in the second half of the year.
As far as implications for investors is concerned, it is impossible to predict markets in the short term with certainty. Staying out of the market is not a choice. We have seen enough and more times in history where bear markets are followed by subsequent bigger bull markets and market doesn’t wait to provide a re-entry point. While volatility is never comfortable, we recommend investors stick with their long-term investment strategy, with an emphasis on quality and diversification. Avoid making emotionally charged investment decisions and remember that time in the market has proven to be a better strategy over time than trying to time yourself in and out of the market.
The message for now is clear – “It is foggy – wear your seat belts, slow down and watch out”
Source: Altitude, Bloomberg
