?In the first quarter of 2025, U.S. financial markets experienced notable volatility. Much of this volatility was influenced by economic policy shifts and investor sentiment.
Equities
Large-cap stocks represented by the S&P 500 Index declined by 4.6% during Q1 2025, marking its worst quarterly performance since 2022. This downturn was primarily driven by investor concerns over new tariffs introduced by the Trump administration, which heightened fears of a global trade war. The Russell MidCap Index also faced challenges, declining 7.97%. The Russell 2000 Index, which represents small-cap companies, decreased by 9.8% in Q1 2025. Small-cap stocks were particularly affected by trade policy uncertainties and rising production costs due to increased tariffs.
The MSCI EAFE Index, representing developed markets, won last quarter, gaining 8.77% as investors flocked to more predictable economies and markets. The MSCI Emerging Markets Index gained 4.97%. The first quarter of 2025 was a mixed bag for emerging markets, with certain regions demonstrating resilience while others faced significant challenges amid evolving global economic conditions.
Bonds
In addition to international wins, bonds have also balanced portfolios. The 10-year U.S. Treasury notes yield fell to 4.23%, a 56-basis-point decline that suggests an increase in bond values. Six-month treasuries started the year at 4.27% and fell to 4.23%. Three-month treasuries remained stable at 4.2%.
The Economy
Q1 faced significant challenges due to new tariffs targeting key imports such as steel, aluminum, and automobiles. This led to increased production costs and concerns over rising inflation. Consumer spending declined on essential and discretionary items in anticipation of higher prices. The Atlanta Federal Reserve’s GDPNow model estimated a contraction of 1.5% in GDP for Q1. Will this happen? We don’t know. However, consumer sentiment has weakened, and two-thirds of Americans expect unemployment to rise over the next year. ?
Takeaway
There was much uncertainty in U.S. markets during the first quarter of 2025. This was marked by trade policy shifts, stock market volatility, and falling Treasury yields. With great uncertainty comes great responsibility to maintain a long-term perspective and diversified investment plan. In other words, don’t panic. Talk to your advisor and rebalance.
