THE BIG PICTURE

The first quarter 2025 has left many investors feeling uneasy due to growing economic uncertainty. The imposition of tariffs on major global trading partners has raised concerns about potential inflation and slowed economic growth, leading some economists to predict a higher likelihood of a recession. 

Although a government shutdown was averted, significant cuts to various programs and government workforce change have intensified political instability. U.S. stock markets have faced a downturn, falling into correction territory before recovering slightly, while international markets have also seen declines but remain in positive territory for the year. 

In such volatile times, predicting the future is incredibly difficult, and any investment changes based on speculation could expose portfolios to unforeseen risks. Making decisions driven by short-term fluctuations can often turn temporary market dips into permanent losses, which is why we advise maintaining a steady, long-term approach. 

Long-term trends indicate that in any 10-year period, in a diversified portfolio, you may experience one or two years with strong investment returns [1], one or two down years, and the other six or so years may yield average returns. Historically, diversified portfolios have shown an average annual growth rate of 6% to 8%, potentially doubling in value over a 10-year period, even amidst ups and downs. 

The main takeaway is that markets fluctuate over time, and a long-term, balanced investment approach is likely the best way to navigate short-term volatility and avoid impulsive decisions.

[1] “The Rewards of Long-Term Investing,” Franklin Templeton, https://www.franklintempleton.com/forms-literature/download/RLTI-FL

Overview

In the first quarter of 2025, global markets faced big changes in policies and economic signals. The U.S. economy started the year with experts predicting a growth rate of about 2%. However, new tariffs and the risk of a trade war created uncertainty, causing market ups and downs and worries about possible retaliation from other countries.

Outside the U.S., the global economic outlook was mixed. Advanced economies like the Eurozone struggled with slow industrial growth and political issues, while developing and emerging markets showed strength. Countries in Emerging Asia, such as India and Vietnam, continued to grow well due to strong local demand and investment. On the other hand, China's economy faced challenges from ongoing trade tensions and a slow property market, leading to a lower growth forecast. Overall, the combination of aggressive trade policies, geopolitical tensions, and different regional economic performances highlighted the complexity of the global market in the first quarter.

The Federal Reserve kept interest rates between 4.25% and 4.5% during this time, deciding not to cut rates as they watched economic data. Investors hoped for rate cuts in 2025, but tariffs, inflation, and other big economic factors made this uncertain. This uncertainty was not welcomed by investors, as shown by the VIX "Fear Gauge" CBOE Market Volatility Index, which went up by 28.41% in Q1 2025.

U.S. Macroeconomics Data

The U.S. inflation rate was quite unstable throughout the quarter, starting at 3.00% in January and then dropping to 2.82% in February. During Q1, the labor force participation rate stayed fairly steady, moving between 62.4% and 62.7%. There were significant job cuts in various federal departments. The unemployment rate fell to 4% in January but slightly rose to 4.1% in February, which was expected.

The U.S. Producer Price Index (PPI), which measures the average change in selling prices received by domestic producers, showed mixed movements due to inflation pressures. In January, the PPI went up by 0.6% month-over-month, higher than the expected 0.3% rise, largely due to a 44% jump in egg prices. Annually, the PPI increased by 3.7% in January. In February, the PPI stayed the same month-over-month and rose by 3.2% annually.

The U.S. dollar saw a significant drop in Q1 2025 because of trade policies and changing investor attitudes. New tariffs introduced by the U.S. government raised fears of a global trade war and weakened the USD's role as a safe haven asset. As the U.S. dollar fell by 3.96%, gold prices hit record highs, surpassing $3,100 with an 18.8% gain for the quarter.

Global Market Performance

  • Global markets were down -1.32% in the first quarter of 2025

  • U.S markets lagged, dropping -4.51% in Q1 2025. The U.S. decline can be largely attributed to concerns over impending tariffs and their economic impacts. Investors are closely watching the impact that these tariffs have on inflation and how The Fed will react. Consumer Discretionary was the worst performing sector, losing -11.75%. the technology sector, which has dominated the U.S. market returns for the past decade, experienced a downturn of -11.05% in Q1 2025. The Energy and Health Care sectors rose 9.94% and 6.54%, limiting the total U.S. market loss.

  • International Developed markets experienced a gain of 6.20% in Q1. International markets grappled with growth prospects and uncertainties surrounding U.S. trade policies. European equities were driven by increased defense and infrastructure spending. Investor sentiment improved across Europe mostly in Germany, which experienced significant gains during the quarter. The STOXX Europe 600 outperformed the S&P 500 by 9.8%.

  • Emerging Markets rose 2.93% and faced challenges from being significantly impacted by the U.S. tariffs and trade protectionism. Industrials sectors and metals were sensitive to these conditions.

Global Investment Factor Performance

  • U.S. Investment Factors experienced mixed performance in Q1 2025. Markets were very volatile because of the uncertainty of tariffs and their economic impact. Minimum Volatility provided the best performance gaining 5.86%. Value also outperformed rising 2.91%. Momentum and Quality provided protection losing –1.88% and –2.91%. U.S. Small caps fell –7.75%.

  • International Developed factors all experienced positive performance. Value was the best performing factor gaining 10.50% and outperforming the market by 4.15%. Minimum Volatility also outperformed the market rising 9.15%. Momentum gained 5.83%. Size and Quality performed similarly gaining 3.53% and 3.51%.

  • Emerging Markets Value gained 4.42% in Q1 2025 and outperformed the market by 141 bps. All other factors experienced negative performance in Q1.

Bond Market Overview

INDEX — QUARTERLY RETURN (Q1 2025)

BLOOMBERG GLOBAL AGGREGATE TR HDG USD — 1.17%

BLOOMBERG US TREASURY US TIPS TR USD — 4.17%

BLOOMBERG US AGG BOND TR USD — 2.78%

BLOOMBERG MUNICIPAL TR USD — -0.22%

BLOOMBERG GBL AGG EX USD TR USD — 2.53%

U.S. Treasuries had a strong quarter as falling yields boosted bond prices. Bond prices rise when the yield falls and vice versa. As stocks decline, investors tend to gravitate toward safer assets (bonds). Investors are closely watching The Fed as potential interest rate cuts in 2025 would put downward pressure on Treasury yields and increase bond prices.

However, Municipal bonds experienced outflows amid concerns about the potential change to their tax-exempt status as Congress may consider eliminating this benefit to fund the extensions of previous tax cuts. Municipals are still appealing to high-net-worth clients due to their lower risk and current tax advantages.

U.S. Treasury yields decreased notably during Q1 reflecting a shift toward safer assets as trade tensions heighten and tariffs have been implemented. This movement indicates investors are concerned with potential economic slowdowns resulting from these policy changes.

The U.S. investment-grade bond spreads hit 94 bps on March 12, 2025, their widest level since September 18, 2024 according to the ICE BofA Corporate Index. High-yield spreads widened to 322 bps, which was also the widest since September 18 according to the ICE BofA High Yield Bond Index. Rising spreads indicate increased borrowing costs for U.S. companies, which can hurt profitability. Spreads are overall still near historic lows.

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