as of March 31, 2025
Global equity markets declined in the first quarter as strong performance for international equities was offset by weak US returns. The Federal Reserve (‘Fed’) continued their cautious approach. Tariffs dominated headlines throughout Q1 with tariffs on Mexico and Canada early in the quarter initially being delayed before finally being implemented. Post quarter end, the Trump administration also announced on April 2nd, that reciprocal tariffs would be applied against all trade partners, with a 10% baseline and much higher tariffs on individual countries. Markets showed muted reactions at first, but as tariffs appeared to emerge as broad policy preference, trade fears sparked broad sell-offs in the U.S. equity market in the first quarter with a much more severe market reaction post quarter end.
The US economy is expected to soften as the effect of tariff uncertainty took hold. The European economy showed signs of stronger growth with the announcement of stimulus to fund increased defense spending, but tariffs could limit upside. US inflation decreased slightly in the first quarter of 2025. Headline CPI was 2.4% year-over-year through March, while core CPI fell to 2.8%, below expectations. Markets are expecting inflation to increase in the short term from tariff pressure. Immigration restrictions could also add inflationary pressure.
Global stocks had a weak start to 2025, returning -1.3% for Q1. The S&P 500 returned -4.3% with the release of DeepSeek (a Chinese AI company) early in the quarter and rising trade uncertainty later in the quarter being a headwind for US equities. International developed stocks returned 6.9% in Q1, rebounding after a weak previous quarter amid improving growth expectations due to rising defense spending and other stimulus in Europe. Emerging markets equities also had a strong quarter with returns of 2.9%
Within fixed income (bonds), the Bloomberg US Aggregate Index returned 2.8% during the quarter. Treasuries returned 2.9%, and corporates were up 2.4%. The yield curve shifted lower during the quarter.
Global developed real estate investment trusts (REITs) returned 1.9% during Q1, outperforming US equity markets by a wide margin. Core listed infrastructure stocks, commodities and natural resources also had positive returns during the quarter.
If the announced tariffs are ultimately implemented, we would expect the US economy to fall into recession shortly. How deep that recession is will depend on how trade tensions develop from here, which is difficult to forecast. As we navigate the market volatility stemming from recent tariff announcements, it is essential to remember that market fluctuations are a natural part of investing. While short-term uncertainties may arise, maintaining a long-term perspective is crucial to achieving retirement goals.
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