We outlined four factors in January: tariffs, taxes, immigration and deregulation that would drive markets in the first half of the year. Tariffs have clearly proven to be the most significant wildcard of 2025. The S&P 500 topped in February, up 4.6% to 6,144 but, ended the quarter down -4.3% to around 5,600. The tech-focused NASDAQ 100 fared worse, down -8.1%, whereas European markets were a bright spot, snapping up by 7 to 10%. However, the major stock market volatility occurred after quarter end with the April 2nd tariff announcement. All United States trading counterparties are now working toward new fair trade agreements. Markets remain on edge and are subject to elevated headline risk until demonstrable and mutually beneficial trade agreements are reached.
Consumer confidence has been slipping and a dour mood has accelerated with sentiment indicators moving to levels not seen since the early days of the Covid Pandemic and during the Great Financial Crisis. Inflation has moderated, but the general price spike that began in 2022 has become embedded in family budgets. Consumers generate nearly 70% of Gross Domestic Product (GDP). The recent disinflationary environment is of little comfort given the prospect that increased tariffs could significantly reflate prices in the coming months.
The economic global world order has been upended this year. Comfortable historic trade and foreign policy relationships are up for review under an overt America-first policy stance. European allies are taking major steps to rebuild their militaries, helping to bolster their equity markets, as they invest in weapons systems to wean themselves from decades of reliance on American military might.
Two sector standouts have been gold and oil. Gold continued its meteoric rise to over $3,300 per ounce, up over 26% year-to-date reflecting its safe haven status. Conversely, oil is down 15% year-to-date to around $60 per barrel, good news for inflation, but may be a precursor to recession.
We have been laser focused on the bond market for signs of recession and/or a broader liquidity panic. Generally a flight-to-quality to U.S. Treasury Securities occurs during big equity market drawdowns or during heightened geopolitical risks. However, the tariff announcement on April 2nd sparked a hard sell-off in bonds (higher yields) that got Treasury Secretary Bessent’s attention and ultimately led to the 90-day tariff pause. The 10-year has steadied around 4.30% after ranging from 4.00-4.80% this year. Recent Treasury auctions have been strong and there are currently no signs that foreign government participation has waned (especially Japan and China) in financing U.S. Government debt.
We came into the year warning clients of elevated market risks given the collection of uncertainties introduced by the policies of the new administration and Congress. Tax policy may be the next trigger for market turbulence. An equitable outcome that prioritizes stimulus to the bottom 50% of income earners could help reverse consumer sentiment. Higher net worth investors are seeking certainty that the Tax Cuts and Jobs Act (TCJA) will be made permanent so as not to sunset at the end of 2025 and possibly impact estate planning. We have spoken to most of our clients in recent weeks and will continue to stay in close touch as we move through this period of market turbulence and uncertainty.