Key Points:
- US stocks dropped in March from a combination of rich valuations and unknown tariff impacts on the global economy.
- Business confidence and consumer sentiment surveys moved lower on the prosed tariffs.
- International stocks and high-quality bonds were bright spots for the quarter after lagging US equities for the past several years.
Elevated policy uncertainty has taken its toll on financial markets in the first quarter of the year. The new administration has unleashed a host of government spending cuts and proposed tariffs on US trade that has given investors and business owners pause. New broad-based tariffs with our largest trading partners have created uncertainty over their impact on global trade and the prospect of higher inflation at a time when the Federal Reserve is trying to bring prices down. US tariffs are currently the lowest among our top 10 trading partners. New tariffs are meant to level the playing field and claw back years of additional costs to US companies. They are also meant to control unwanted behavior: closing the border with Mexico and Canada as well as additional tariffs on any nation currently buying Russian oil (China & India). With the US having large trade deficits with many of our trading partners, how long the tariffs remain in place is the wild card. The new tariffs could be in place for days, months or years before new trade agreements are hashed out and that uncertainty makes it extremely difficult to plan for. Business confidence and consumer sentiment have moved down, bringing the probably of a recession this year higher, but now a foregone conclusion.
As a result of all of this uncertainty, stocks fell for the second consecutive month with the DJ Industrial Average down 4.1%, the S&P500 dropping 5.6% and the NASDAQ Composite losing 8.1%. Technology and consumer discretionary stocks were the worst performers, down almost 9%, while energy was the only positive sector, up 3.9%. Globally diversified investors fared better as international stocks moved meaningfully higher in the first quarter. European equities are up 10.5% while Chinese stocks have gained 15%, on the back of their largest technology companies perhaps gaining an AI edge in Deepseek.
High quality bonds had a good quarter with the Bloomberg US Aggregate Bond Index up 2.8% for the year. Yields across the Treasury curve have moved down as investors sought some safety in bonds among the economic uncertainties. High yield bonds fell in March as credit spreads (additional yield required by bond buyers) moved higher. The Federal Reserve will be looking to employment data but will likely keep rate cuts on hold for the coming months. They would like to avoid cutting rates too early and then have to raise them if inflation accelerates. Expect high volatility moving forward, but long-term investors are typically better off sticking with their long-term asset allocations despite the noise.almost 60% of its revenue from international sales last quarter. For Microsoft, Google Tesla and Facebook, revenues were close to 50% outside the US. There is sure to be pressure from inside and out to resolve some of the trade imbalances across the globe. Expect elevated volatility along the way.
Sources: Morningstar Direct, Wall Street Journal, Invesco, JPMorgan