Monthly Market and Economic Update - March 2025

Current Market and Economic Conditions

• For the first quarter, the S&P 500 Index was down 4.27%, while the Bloomberg Barclays US Aggregate Bond Index was up 2.78% and the Bloomberg Barclays Municipal Bond Index was down 0.22%.1
• Following the end of the quarter, the Trump Administration announced “reciprocal” tariffs. The initial stock market response was negative as the level of the tariffs was more severe than expected.
• The Federal Reserve is balancing the risks of potentially higher inflation with the potential for slower economic growth.

Bond Market

• The markets are still absorbing the impact of the new tariffs. The two potential outcomes are higher prices and slowing economic growth. During his press conference in March, Federal Reserve Chairman Jerome Powell said “that they are well-positioned to wait for further clarity. And not in any hurry” to make changes to monetary policy. In his remarks, he stated that belief stems from the fact that they can pivot either to reduce interest rates if the economy slows or hold rates if the inflation persists. 
• The Fed Fund futures market is forecasting that the Fed may cut as soon as June and potentially cut the Fed Funds rate three times before the end of this year. The market is likely projecting a slowdown in the economy and a possible reduction in the tariffs without a significant rise in inflation. If inflation spikes and the economy slows, a phenomenon known as “stagflation,” The Fed will be in a difficult quandary as it will have to decide whether to boost the economy by lowering interest rates or fight inflation by keeping interest rates higher.2
• Following the announcement on the tariffs, the 10-year Treasury yield dropped to 4.05% as some investors sold stocks and bought Treasury bonds in a “flight to safety” trade.3 
• For bond investors, the recent fall in interest rates has meant a rise in bond values and a positive total return year to date. Also, due to the higher relative bond yields any change in interest rates whether up or down will have less impact to bond values than when the starting yields were much lower a few years ago.

Stock Market

• The stock market, as measured by the S&P 500 index, is now in correction territory having fallen more than 10% from the most recent high in mid-February. The NASDAQ Index, which is heavily weighted toward the so-called Mag 7 stocks, is down even more getting close to bear market territory, defined as a drop of 20% or more. It was clear even before the tariffs were announced that this part of the market was significantly overvalued. Small cap US stocks, which are very sensitive to the economic cycle, are also down close to bear market territory.
• Conversely, the part of the stock market that has been on an upward trajectory so far in 2025 are international stocks. The MSCI EAFE International Index is up 7.8% year-to-date. This may seem counterintuitive in the face of looming trade wars. However, international stocks were trading at a 32% price-earnings discount to US stocks as of the end of the quarter. Of course, this short-term momentum may be under pressure given the significant change in global trade. It does show that the market looks for opportunities to buy stocks cheap during stressful times and that diversification is an important factor for long-term investors. Market leadership changes quickly and without much notice. Diversification means that investors are properly positioned when this happens.4,5 
• Investors generally dislike uncertainty, particularly when stock prices are high. Historically, the market tends to be volatile and underperform in the first year and a half of a new administration, regardless of the political party in power, as the market adjusts to new fiscal policies. The market has been expecting the new administration to provide pro-growth stimulus, with a focus on deregulation, tax cuts, and stable energy prices and interest rates. However, the initial change in fiscal policy has caused the market to react negatively to the implementation of tariffs which may slow economic growth in the short run and potentially be inflationary, at least initially. If the next step is to focus on the pro-growth policies, the market is likely to regain momentum. Both the markets and the Federal Reserve are in a wait and see pattern looking for signs on whether the economy is going to suffer from stagflation – slower economy and higher inflation. During this period of market discourse, rather than focusing on days or weeks of volatility, investors should continue to focus on the longer-term path of the stock market and the economy and take advantage of short-term volatility by rebalancing to their appropriate risk profile.

Portfolio Management

• The allocation for each investor should be diversified between growth and safety based on their own tolerance for risk in the short run and their desire for growth in their investments in the long run. Determining the appropriate asset allocation and risk-reward trade-off is the most important decision for investors.  Once determined, staying invested during periods of uncertainty and rebalancing back to the selected risk profile can help investors achieve their long-term goals.  

Please contact your Advisor if you have questions or concerns.