First Quarter Market Recap

Amid tariff fears, DOGE austerity measures, and Trump policy uncertainty, the S&P 500 declined -4.28% in the first quarter. US stocks fell across all sizes and styles, with the Consumer Discretionary, Technology, and Communication Services sectors being hit the hardest. Energy, Health Care and Consumer Staples performed the best. Global markets outperformed the US led by Europe and China where investors were encouraged by stimulus announcements.

Bonds produced positive returns as yields fell in a flight to safety. The 10-year Treasury yield peaked in mid-January at 4.79% before retreating to close the quarter at 4.21%. The average 30-year mortgage rate (bankrate.com) fell from 7.28% to 6.77%. Gold prices gained nearly 20% to an all-time high while oil prices saw little change during the quarter.

Economic Summary and Outlook

The reciprocal tariffs announced on April 2nd and subsequent retaliatory tariffs sparked investors’ fears of accelerating inflation and lower growth both in the US and around the world. Many questions remain regarding tariffs, including their ultimate objective, magnitude, permanence, and timeline. Some countries will retaliate and some will negotiate. In the near term, corporations will protect margins by reevaluating capital spending plans and personnel decisions. We believe anxious consumers are likely to save more and spend less.

Imposing a tariff on every country—a move at odds with standard economic principles—forced economists to lower economic growth expectations for the second quarter (GDP) to between 0 and -1% and increase inflation expectations by 1%. Concurrently, global growth targets are being pushed down. We expect tariff policy to evolve and remain fluid as a negotiation period ensues.

The Fed has held interest rates (short-term federal funds rate) steady since December. While always ready to protect jobs, the threat of heightened inflation creates a higher hurdle for policymakers to ease interest rates. The Fed meets May 7th to make their next rate decision, yet the committee does have the ability to act between meetings in case of emergency. Chairman Powell recently stated that the impact of tariffs is still unclear, and the FOMC will wait to ease to ensure inflation expectations do not become entrenched. Bond investors reacted to announced tariffs by pushing Treasury yields lower across most maturities, signifying a slower growing economy ahead and effectively easing for the Fed.

Equity investors reacted to the news by assigning a lower price-to-earnings (P/E) ratio, the most common valuation metric, to stocks. Earnings estimates for the next year have held up until now, signaling 7% growth compared to last year. Estimates are sure to fall for the remainder of the year as corporations report first quarter results over the next few weeks. We expect growth targets to be tempered to match the chaotic backdrop.

A strong job market, with over 200,000 jobs added in March, was not enough to thwart investor pessimism, as most expect the unemployment rate to tick up from 4.2% as the year unfolds. The President appears intent on re-wiring the world trade economy despite the unknown impact. Investors started the year expecting a pro-business agenda to lift growth and stocks; instead, we were greeted with a policy that penalizes the most efficient production. Once the rules of the road are firmly established US companies can adjust business models, as they have done repeatedly through every major crisis. Tandem expects short-term market volatility for stocks and bonds due to global issues like rising prices and broken alliances.

The Administration’s current focus is reducing the trade deficit and lowering interest rates. Later in the year, the focus is expected to shift to fiscal policy that would be beneficial to economic growth: deregulation and extension of the 2017 tax cuts.

Navigating the complexities of financial markets requires a steady hand and a long-term vision. At Tandem, we understand that market volatility is inevitable, and short-term fluctuations are often just noise obscuring underlying trends. We champion a disciplined, long-term investment approach built on a deep understanding of capital markets and a commitment to evidence-based investment. We are committed to providing you with the transparency and support you need to confidently navigate the investment landscape and achieve sustainable, long-term growth.