This past week has been extremely volatile, and capital markets have reacted strongly. Let’s recap what has happened.
On April 2nd, the Trump administration released its new tariff rates on countries across the world. Instead of being focused on a few specific countries, a broad 10% tariff was spread across the board as a starting point (with some exceptions). Reciprocal tariffs have also been placed on countries that the administration claims have a higher tariff rate on the U.S. The resulting tariff announcements have brought the average tariff rate on U.S. imports to levels we have not seen since the 1930’s. Capital markets have reacted so strongly because this is a worse outcome than anyone expected. While the main concern coming into this week was at what level do U.S. tariff rates end? Markets are now reflecting concern that the new, higher than expected, tariff rates will cause other countries to deploy countermeasures resulting in an all-out trade war. Unfortunately, uncertainty has just changed form from policy alone to whether or not a soft landing can be orchestrated in the midst of a tariff-induced slowdown.
In March, the S&P 500 was down 5.6%, its worst monthly performance since December 2022. Just as the largest technology stocks led the market on its way up in 2023 and 2024, they also led the market down in March 2025. Despite achieving three all-time closing highs during the first quarter of 2025, the S&P 500 posted a cumulative -4.3% return for the period, marking only the second time this index dropped during the previous 10 quarters. The only other quarter the market closed down was the third quarter of 2023. The S&P 500 was not the only index suffering its worst quarter in three years. The NASDAQ was down 10.3% during the first quarter, its worst since the second quarter of 2022. Market sentiment, particularly focused on many of the “Magnificent Seven” stocks, continued to sour during the last week of March when Alibaba’s Chairman, Joe Tsai, warned about a bubble in AI data center buildout. Chipmaker Nvidia’s stock price has fallen 28% from a January peak while Microsoft, Amazon, Alphabet, and Meta have all fallen 20% or more from their own record highs. In fact, if it were not for these seven stocks, the S&P 500 index would have been up 0.6% during the first quarter instead of being down -4.3%. While domestic large-cap stocks were down during the first quarter, domestic small-cap stocks fared even worse. The Russell 2000 index was down 6.8% in March and 9.5% during the first quarter.
There has been a shift over the past twelve months in the market away from more volatile stocks towards defensive stocks, evident when looking at the best performing sector in the S&P 500; utilities (+23.9%). For the third consecutive month, value beat growth across all market capitalizations. The biggest advantage of value over growth was among large-cap stocks. While growthier stocks were the leaders in January in an up market, defensive stocks were the leaders as the market contracted in both February and March. There has also been a shift in performance when comparing domestic to international equities. While the S&P 500 index was down 4.3% during the first quarter, the MSCI ACWI ex US Index was up 5.4%. For the 12-month period ending March, the MSCI Emerging Markets Index is beating the S&P 500 index (8.6% vs. 8.3%). International equities have served as a strong equity diversifier for portfolios in the first quarter as U.S. equity markets have sold off.
While the Bloomberg Aggregate Bond index was flat in March, it was up 2.8% during the first quarter, providing ballast for balanced portfolios holding stocks and bonds. The 10-year Treasury yield closed the first quarter at 4.25%, in line with its 4.23% close at the end of February. There was less movement in the 10-year Treasury yield in March compared to the first two months of the year as its lowest close was 4.18% on March 3rd and its highest close was 4.37% on March 27th. As concerns shifted from potential recession to higher-than-expected inflation data, yields moved between the low and high points to close the month around the midpoint of its trading range. As interest rates have been relatively rangebound, the coupon from fixed income is providing its expected role of contributing to total return. With the yield on the Bloomberg U.S. Aggregate currently around 4.5%, forward expected returns look attractive for fixed income as an asset class as the starting yield for fixed income has historically explained a large portion of the next 5-year returns.
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Schneider Downs Wealth Management Advisors, LP (SDWMA) is a registered investment adviser with the U.S. Securities and Exchange Commission (SEC). SDWMA provides fee-based investment management services and financial planning services, along with fee-based retirement advisory and consulting services. Material discussed is meant for informational purposes only, and it is not to be construed as investment, tax or legal advice. Please note that individual situations can vary. Therefore, this information should be relied upon when coordinated with individual professional advice. Registration with the SEC does not imply any level of skill or training.
