March 2025 Financial Markets

Macroeconomic indicators are a mixture of soft data regarding current and future sentiment and official government hard data that are currently showing warning signs given the uncertain impact of anticipated policy changes. February’s CPI monthly increase of 0.2 percent came in lower than expected and the Federal Reserves’ preferred measure of inflation, core PCE, rose more than expected, putting the 12-month inflation rate above target at 2.8 percent. The ISM Manufacturing PMI survey results weakened to 49 (below 50 indicates economic contraction) with other parts of the report indicating slowing activity/sales/hiring and rising prices/inventories. The Conference Board Consumer Confidence Index survey indicators tumbled further with the Expectations Index component declining to its lowest level in twelve years.

Equity markets

March madness, typically confined to college basketball arenas, certainly lived up to its name as volatility surged with the VIX (CBOE Volatility Index) closing the month at 22.28, alongside uncertainty of how the White House will reshape global trade. The S&P 500 index declined sharply in March by 5.9 percent with 349 companies in the index posting a negative return. On a sector basis for the month, Technology (-8.8 percent) and Consumer Discretionary (-8.9 percent) fared worse, while Energy (+3.9 percent) and Utilities (+0.3 percent) were the only positive contributors. In the U.S., growth (R3000G -8.4 percent) trailed value (R3000V -2.9 percent) for a third consecutive month across the size spectrum, with a year-to-date spread of 11.6 percent between all cap value (R3000V +1.6 percent) versus growth (R3000G -10.0 percent). On a year-to-date basis, the Russell 1000 Value at 2.1 percent was the lone positive portion of U.S. markets, while the Russell 2000 Growth was the worst-performing segment. Small and mid cap stocks suffered another monthly decline (Russell 2000 -6.8 percent and Russell Midcap -4.6 percent).

International equity markets, including both developed (EAFE +6.9 percent) and emerging regions (EM +2.9 percent), were positive and significantly outperformed the U.S. (S&P 500 -4.3 percent) in the first quarter. Valuation spreads, a weakening U.S. dollar and potential impact of tariffs on U.S. equities were tailwinds. In the developed markets during the first quarter, Europe (10.6 percent) outperformed on a regional basis, with outsized returns in France (10.3 percent) and Germany (15.6 percent), while emerging markets also had Europe (16.8 percent) outperform on a regional basis with a surge in Poland (31.3 percent) along with strong returns in Brazil (14.1 percent) and China (15.1 percent).

Fixed income

Fixed income returns were generally positive in the month and the Bloomberg Aggregate index returned 2.8 percent year to date through March, providing positive diversification to the negative equity environment.

Looking at the yield curve below, March month-end interest rates (the blue line) declined modestly at the short to mid-end area through 7-years and increased at the longer end from 10- to 30-years since February. Since the start of the year the downward trend on interest rates continued, as yields dropped the most at 5-year maturities that fell 43 basis points. The Federal Reserve held rates steady at their mid-March FOMC meeting as they also sensed elevated uncertainty with a downgraded collective economic outlook.

Looking ahead

As we mentioned previously, the White House continues to flood the airwaves with announcements related to tariffs, immigration, re-organization of the U.S. government, national security and prospective changes to long-term global relationships. The advantages of portfolio diversification, particularly evident in the first quarter, were highlighted in a way not witnessed in many years. Our advice continues to be focus on the long term, review your strategic asset allocation, rebalance where appropriate and avoid the risk of short-term thinking dominating longer strategic policy decisions.

P.S. With regards to the long-awaited tariff announcement of April 2, the early indications are that this reshaped global trade environment will likely have ramifications for near-term inflation and growth sentiment. On the one hand, while knowing the environment in which to run a company at a minimum alleviates near-term uncertainty, it seems that this might be just the first salvo in long-term negotiations. More time is needed to analyze the data, as the devil is always in the details, so stay tuned.