All market environments carry some level of uncertainty, but the first quarter of this year brought more than usual, particularly on the trade front. The Trade Policy Uncertainty Index hit an all-time high¹, reflecting growing investor anxiety. This uncertainty translated directly into market volatility, with the S&P 500 entering correction territory after falling more than 10% from its recent peak.²

The word of the quarter was tariff, as the Trump administration adopted a more hawkish stance on trade, particularly with some of the U.S.’s largest trading partners. As a result, the S&P 500 ended the quarter down more than 4%³, its worst quarterly performance since 2022.³ Technology stocks were hit especially hard, posting their worst quarter since the onset of COVID.⁴

In contrast, international markets outperformed. European stocks gained more than 10% for the quarter, while Chinese equities rose nearly 15%. Bonds also provided a cushion: the Bloomberg U.S. Aggregate Bond Index (AGG) was up about 2%, and longer-duration Treasuries, tracked via TLH, gained approximately 4%.³ Despite the volatility, Q1 served as a strong reminder of the importance of diversification.

Consumer sentiment declined to its lowest level since November 2022⁵, while 5-year inflation expectations rose to a 32-year high⁶, signs that the general public remains uneasy about the economic outlook. A March CNBC Fed Survey showed the probability of a recession at 36%, up from 23% in January⁷. While soft data (such as sentiment surveys) has weakened, hard remains relatively stable.

At the start of the year, we differed from consensus by anticipating greater market volatility. Our caution was driven by high equity valuations, increasing trade tensions, and broader fiscal policy uncertainty. As a result, we maintained a more conservative tilt in our portfolios throughout Q1, a strategy that served us well.

From an economic standpoint, we believe the fundamentals remain sound. However, there are signs of weakness—particularly in the labor market. March saw the highest number of job cuts since May 2020⁸, and the quit rate dipped below the long-term average of 2%, coming in at 1.9%⁹. While we do not currently anticipate a near-term recession, we remain cautious about the potential long-term effects of persistent tariffs. Importantly, current market pricing does not appear to reflect recession risk. As always, we are closely monitoring economic developments and adjusting portfolios as necessary.

We encourage clients to stay invested according to their personalized risk speed and maintain a long-term perspective. Avoiding short-term noise remains critical to long-term success.

Sources:
1. Trade Policy Uncertainty Hits Record High Ahead of Trump’s April Tariffs. https://www.investing.com/news/economy-news/trade-policy-uncertainty-hits-record-high-ahead-of-trumps-april-2-tariffs-3958996. Accessed April, 2025.
2. S&P 500 Flirts with Correction Territory. https://www.marketwatch.com/story/s-p-500-flirts-with-correction-territory-as-trumps-trade-war-escalates-heres-what-history-says-could-happen-next-f4e779d9. Accessed April, 2025.
3. SPDR S&P 500 ETF Trust (SPY). https://ycharts.com/companies/SPY/chart. Accessed April, 2025.
4. Q1’s Dramatic Rotation Stocks. https://www.morningstar.com/markets/13-charts-q1s-dramatic-rotation-stocks. Accessed April, 2025.
5. United States Consumer Confidence. https://tradingeconomics.com/united-states/consumer-confidence. Accessed April, 2025.
6. US Consumer Sentiment Sinks as Tariffs Drive Price Expectations. https://www.bloomberg.com/news/articles/2025-03-28/us-consumer-sentiment-sinks-as-tariffs-drive-price-expectations. Accesses April, 2025.
7. Recession Planning Trump Tariffs. https://www.usatoday.com/story/money/2025/04/03/recession-planning-trump-tariffs-stocks-savings-debt/82791356007/#:~:text=A%20March%20CNBC%20Fed%20Survey,following%20Trump’s%20latest%20tariff%20announcement. Accesses April, 2025.
8. United States Challenger Job Cuts. https://tradingeconomics.com/united-states/challenger-job-cuts. Accessed April, 2025.
9. United States Job Quits Rate. https://tradingeconomics.com/united-states/job-quits-rate#:~:text=Job%20Quits%20Rate%20in%20the%20United%20States%20averaged%202.01%20Percent,U.S.%20Bureau%20of%20Labor%20Statistics. Accessed April, 2025.

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