First Quarter 2025: Markets Correct on Tariff Uncertainty

Financial markets started out the year in a similar fashion to last year with new highs in equities, steadily declining bond yields, and tame economic data. A new all-time high was recorded on February 19th for the S&P 500. Then a heightened level of uncertainty began to develop as President Trump’s policies and executive orders started to take shape and introduced volatility across asset classes.

Let’s take a close look at how markets and the economy fared in the first quarter, and particularly the month of April.

MARKETS: Most U.S. indexes fell into correction territory (down 10% or more from their recent highs) as you can see from the table below. It is worth noting that we came into 2025 on the heels of two stellar years in the stock market. As of Monday, April 21st, even with the recent declines, the S&P 500 has simply returned to the levels last seen in May 2024, around 5,270.

The bright spot so far in 2025 has been European equities, up nearly 8% as indicated by the MSCI EAFE index. This performance underscores the value of diversification, as international markets have provided a welcome counterbalance to recent U.S. market softness. In times of volatility, having exposure across regions and asset classes remains a cornerstone of resilient, long-term investment strategies.

Early 2025: Markets Correct

The year 2024 seems like ages ago when it was coined the year of U.S. exceptionalism, given strong equity gains relative to the rest of the world.
The Trump Administration tariff announcements created a series of market destabilizing issues that we are still dealing with today.
The April 2nd tariff roll-out was much more severe that the perceived worst-case scenario of 15-20% tariffs.
Tariffs by Country - all imports would be subject to at least a 10% tariffs plus additional tariffs imposed by some of our meaningful trade partners: China 148% at last count, Europe 20%, India 26%, Japan 24%, and South Korea 25%, to name a few.
Market reaction with swift and created a 4-day equity decline and unease in the Treasury bond auction.
On April 9th, we got word of a 90-day suspension of the tariffs which sent the Dow Jones up over 3,200 points, or 7.9% in a day.
A few days later, Trump granted exemptions from the 125% tariffs on electronics including phones, laptops, chips, and other electronic components.
Today, we are in the midst of a market correction, and in certain areas, a bear market defined as a 20% fall or more from their recent highs.
Investors, markets, world leaders, company management alike are dealing with a heightened level of uncertainty which is not healthy and is affecting investment, spending and planning.
The global macroeconomic and geopolitical outlook remains in a state of considerable flux as we progress in 2025.
We will likely see the uncertainty in spending flow through into slower economic growth.
Probabilities of a recession have risen but are highly dependent on the policy changes by the President, not a systemic issue within our economy.

ECONOMIC DATA: As you’ll see from the data below, many economic indicators have yet to reflect the full impact of the economic uncertainty created by the trade tariffs. While we have recorded a meaningful deterioration in consumer sentiment, this has not yet translated into lower sales. The March retail sales report a surprise to the upside with a 1.2% increase in growth over February, signaling continued resilience in consumer activity for now.

We expect the May and June economic reports will begin to show demand weaknesses and softening demand. This anticipated slowdown could become another headwind for the markets in the near-term, even if we get some tariff relief in the form of mutual country agreements.

Some relief to both equity and bond markets could come if the Federal Reserve decided that the time was right to continue its path of interest rate cuts.

Unfortunately, we see ourselves in a period of instability for the next few months with markets remaining highly reactive to both economic and policy news. While economic reports happen on specific dates, policy news has a more erratic cadence, which will keep volatility and uncertainty high.

Economic Data to Start 2025:

March CPI inflation data cooled with CPI up 2.4% year-over year. A welcome report.
Producer price index (PPI) also slowed to -0.4% in March from April.
March U.S. employment report was a positive reading with 228,000 new jobs created.
U.S. consumer confidence fell to a 92.9, a reading not seen since the COVID pandemic.
Eurozone consumer confidence in April fell to an 18-month low.
European Central Bank (ECB) cut rates by 0.25% at their meeting in mid-April for a total of 1.75% points of rate cuts since June 2024 (U.S. cut rates 1.00% points in all of 2024, in comparison).
Fed Chair Powell’s recent comments poured cold-water on the hopes the Fed would cut rates due to his belief that announced tariffs could be inflationary.
Corporations began to report first quarter results with financial firms beating estimates, but many were reticent to provide full year guidance given the uncertain path of the economy.
While President Trump has announced constructive talks with Beijing, the EU, India and Japan, there has been no concrete agreements made as of this publication date.
IMF cuts U.S. economic GDP forecast to 1.8% from 2.7% over Trump tariff concerns.
Business and wholesale inventory readings grew in latest reports likely due to buying ahead of imposed tariffs.
U.S. leading economic indicator index fell sharply in March to 100.5, down -0.7%.

WARREN BUFFET ADVICE: Many investors are anxiously awaiting the Berkshire Hathaway annual meeting on May 3rd where we will hear from Warren Buffet, the sage investor who is always keen on buying market dips and who has long advocated for a calm disciplined approach during turbulent markets.

During the bear market of the 1970s, Buffet remarked:

It’s never easy to heed this advice, especially when we are in the middle (or the beginning) of a market downturn with no clarity as to how deep the declines may go or how long they will last. Maintaining a long-term mindset, staying invested, and focusing on fundamentals (not headlines) is often what separates successful investors from the rest.

CONCLUSION AND WHAT’S NEXT: At Sandy Cove Advisors, we have lived through many unsettled times including the Dot Com bust, Great Financial Crisis and Covid pandemic, to name a few. We have always come out the other side and are keeping our calm. We are focused on taking advantage of market dislocations via tax-loss harvesting and investing new cash at attractive valuations for certain clients where appropriate.

We have seen damage to consumer and business confidence that may not be quickly reversed by any meaninful tariff negotiations. Business planning cycles for hiring and investing have no doubt been paused and restarting will take time. The rapid announcment of material trade policy changes has likely taken a toll on the consumers’ outlook and that will take time to heal. U.S. trade actions have triggered reciprocal responses from global partners. The markets are in a difficult position trying to determine the ultimate outlook and timing of world trade and economic growth. Until we get some answers to the myraid list of uncertainties, we’re likely to be range bound with volatile one-day swings more the norm than the exception.

As always, we remain focused on the longer-term view. We’re ensuring that our clients are positioned with the proper asset allocations that reflects their time horizon and risk-tolerance levels. As with other major market dislocations, we firmly believe that this too shall pass and that on the other side there will be opportunity and growth.

As always, please reach out to us if you have any questions.