Policy Uncertainty Weighs on Markets in Q1

Quarterly Insights – April 2025

Volatility gripped markets in the first quarter of 2025 and the major stock indices saw  moderate declines as chaotic U.S. trade and tariff policies caused a steep plunge in  business and consumer confidence, which raised concerns that economic growth  would dramatically slow and corporate earnings growth would disappoint.  

Stocks started the new year by extending the declines of late 2024, as worries the  Federal Reserve could pause interest rate cuts weighed on the markets early in  January. However, solid economic data, encouraging inflation readings and positive  commentary from Fed officials about future rate cuts pushed back on those fears  and the S&P 500 recovered much of those initial losses by mid-month. Additionally,  stocks rallied into and following Inauguration Day, as investors anticipated a “pro growth” administration taking power while fears of dramatic tariffs on “Day One” of  the Trump presidency went unfulfilled. The S&P 500 hit a new all-time high shortly  after President Trump’s inauguration and the rally continued into late January after  the Fed signaled it still expected to cut rates in 2025, further calming fears of a pause  in rate cuts. However, at the very end of January, investors got a preview of looming  tariff/trade volatility when President Trump threatened 25% tariffs on Colombia.  However, those tariffs were not ultimately implemented, so markets largely ignored  them and stocks finished January with a solid gain.  

Trade and tariff policy became a major influence on markets in February, however,  and dramatically increased market volatility by month-end. During the first few days  of February, President Trump threatened and then delayed 25% tariffs on Mexico and  Canada, which temporarily spiked market volatility. However, the one-month delay  of those tariffs led markets to believe that President Trump was using tariff threats as  a negotiating tactic and that substantial tariffs would not be implemented after all.  That sentiment helped to ease investor concerns while economic data remained  solid. Those factors combined to send the S&P 500 to a new all-time high on  February 19^th. However, the rally would not last. In late February consumer confidence  declined dramatically and some economic reports implied the trade and tariff 

uncertainty was starting to slow economic growth. Those fears were reinforced when  the Atlanta Fed’s GDPNow turned negative, implying economic growth may be  stalling. Meanwhile, tariff threats and general policy volatility continued through the  end of the month and that, combined with plunging consumer sentiment, sparked a  “growth scare” amongst investors that weighed on stocks and sent the S&P 500  marginally lower in February.  

The market declines accelerated in March as President Trump made good on his  threat to implement 25% tariffs on Mexico and Canada (and an additional 10% tariff  on China). President Trump delayed some of those tariffs on Mexico and Canada  until early April, but many other tariffs were left in place and that shattered investors’  belief that tariff threats were just a negotiating tactic. Meanwhile, several  corporations from various sectors began to lower earnings guidance, citing reduced  consumer spending and business investment. Those guidance cuts reinforced fears  that policy uncertainty could cause an economic slowdown, and the S&P 500 fell to a  six-month low. In late March, markets tried to rebound amidst a lull in tariff threats  but it didn’t last as President Trump announced 25% auto tariffs on March 26^th,  sending stocks lower once again. The S&P 500 finished the quarter near the year-to date lows.  

In sum, investor optimism for a pro-growth agenda and tax cuts was replaced by  rising concerns about a new global trade war and a slowing U.S. economy, as policy  uncertainty and ineffective communication crushed investor and consumer  confidence.  

First Quarter Performance Review  

Market internals revealed that while the S&P 500 logged a moderately negative  return for the quarter, the declines in the index were mostly due to sharp drops in  widely held technology and consumer stocks, as other parts of the market proved  resilient.  

To that point, on a sector level, only four of the 11 S&P 500 sectors finished the quarter  with a negative return and two of those four sectors saw only fractional declines. As  mentioned, the consumer discretionary and tech sectors were, by far, the worst performing sectors in the first quarter as both saw substantial declines. And, since  those two sectors carry some of the largest weights in the S&P 500, they weighed on  the overall index performance. The consumer discretionary sector was the worst 

performer for the quarter as it was hit by intense weakness in one of the largest  consumer stocks (Tesla) combined with general concerns about lower consumer  spending in the face of policy uncertainty. The technology sector was the other  substantially negative performer in the first quarter as tech stocks fell following the  debut of the Chinese AI program DeepSeek, which challenged assumptions about  the future economic benefit of AI for major tech firms.  

Looking at sector outperformers, energy was the top-performing sector in Q1 thanks  to rising demand expectations following strong Chinese economic data and after  some European countries committed to increasing debt to fund economic growth.  The healthcare, utilities and consumer staples sectors logged modest gains in Q1, as  those traditionally defensive sectors were viewed as more insulated from any new  trade wars and tend to be more resilient in the face of an economic slowdown.  

From an investment style standpoint, value significantly outperformed growth in Q1  as growth strategies posted substantial losses due to their large weightings of tech  and consumer stocks. Value strategies logged a slightly positive return over the past  three months and benefited from exposure to a broader array of sectors that traded  at lower valuations and were not as impacted by the negative headlines in the first  quarter.  

Finally, looking at performance by market cap, small caps declined sharply in the  first quarter and lagged large caps thanks to a combination of rising worries about  economic growth and still high interest rates. Large cap indices also declined in the  first quarter, although those losses were more modest.  

US Equity Indexes

Q1 Return YTD 

S&P 500 -4.27% -4.27% DJ Industrial Average -0.87% -0.87% NASDAQ 100 -8.07% -8.07% S&P MidCap 400 -6.10% -6.10% 

Russell 2000

-9.48%

-9.48%

Source: YCharts 

Internationally, foreign markets massively outperformed the S&P 500 and finished the  quarter with a substantially positive return. Foreign developed markets saw the largest  gains and outperformed emerging markets after Germany and other EU countries  signaled a willingness to increase deficit spending to boost economic growth and  defense. Emerging markets logged more modest gains thanks to better-than 

expected Chinese economic data.  

International Equity Indexes

MSCI EAFE TR USD (Foreign  

Q1 Return YTD 

_Developed) 7.01% 7.01%  

MSCI EM TR USD (Emerging Markets) 3.01% 3.01% 

MSCI ACWI Ex USA TR USD (Foreign  Dev & EM)

5.36%

5.36%

Source: YCharts  

Commodities were modestly positive in the first quarter as strength in gold helped to  boost the major commodity indices. Gold hit a new record high and traded above  $3000/oz. thanks to a weaker U.S. dollar and increased demand following policy  volatility from the new administration. Oil logged a small loss but finished well off the  lows of the quarter thanks to better-than-expected Chinese economic data and  expectations for more demand from Europe.  

Commodity Indexes

S&P GSCI (Broad-Based  

Q1 Return YTD 

_Commodities) 4.89% 4.89%  

S&P GSCI Crude Oil -0.51% -0.51% 

GLD Gold Price

19.02%

19.02%

Source: YCharts/Koyfin.com  

Switching to fixed income markets, the leading benchmark for bonds (Bloomberg  Barclays US Aggregate Bond Index) realized a modestly positive return for the first  quarter of 2025. Better-than-expected inflation readings and general concerns  about economic growth boosted bonds broadly and helped longer-duration bonds 

to outperform shorter-duration bills and notes, as investors sought higher long-term  yields amidst policy uncertainty.  

Turning to the corporate bond market, higher-quality but lower-yielding investment grade bonds outperformed higher-yielding but lower-quality bonds in the first  quarter and that reflected investor concerns about future economic growth amidst  policy uncertainty. However, both investment-grade and high-yield corporate bonds  finished the first quarter with modest gains, reflecting a still present sense of  economic optimism from bond investors.  

US Bond Indexes

Q1 Return YTD 

BBgBarc US Agg Bond 2.78% 2.78% 

BBgBarc US T-Bill 1-3 Mon 1.04% 1.04% 

ICE US T-Bond 7-10 Year 3.90% 3.90% 

BBgBarc US MBS (Mortgage 

_backed) 3.06% 3.06%  

BBgBarc Municipal -0.22% -0.22% 

BBgBarc US Corporate Invest Grade 2.31% 2.31% 

BBgBarc US Corporate High Yield

1.00%

1.00%

Source: YCharts  

Second Quarter Market Outlook  

Stocks begin the second quarter of 2025 following the worst quarterly performance  in nearly three years and facing dual market headwinds of policy uncertainty and  potentially slowing economic growth. However, while clearly markets are facing  legitimate headwinds, it’s important to realize that stocks fell in the first quarter  mostly on fears of what might happen in the economy, not because of what is  actually occurring. Point being, if future policy decisions and an economic slowdown  aren’t as bad as currently feared, it could cause a substantial market rebound in the  coming months.  

Starting with trade and tariff policy, there can obviously be improvement in the  communication strategy from the administration regarding its policy goals and there  were signs late in the first quarter that officials realized their errors and were working  to communicate more directly, effectively and consistently with markets. Regardless 

of what actual tariff policy ultimately looks like, improvement in communication of the  administration’s policy goals will be a market positive and could help end this  pullback.  

Turning to economic growth, while fears of a slowdown surged in the first quarter,  economic data stayed mostly resilient. Jobless claims remained subdued, measures  of manufacturing and service activity showed continued expansion and the  unemployment rate remained historically low, close to 4.0%. Put simply, there was little  in the actual data in Q1 to imply the economy is weakening. If economic data stays  solid throughout the second quarter, it will push back on those recession fears and  could help fuel a rebound in the markets.  

On market valuation, the declines of the first quarter have resulted in the S&P 500  trading at a more reasonable valuation compared to the start of the year, as  extremely bullish investor sentiment has been replaced by a decidedly bearish outlook  (which has historically set the stage for a market rebound). Bottom line, the market  was richly valued at the start of the year and investor sentiment was complacent, but  the volatility of the first quarter has removed both of those conditions and that is a  general positive for the markets.  

Finally, while the S&P 500 suffered moderate declines in the first quarter, there were  many parts of the market that weathered the volatility and posted positive returns.  More than half of the sectors within the S&P 500 logged positive returns in the first  quarter while two other sectors only saw slight declines, underscoring that the volatility  we witnessed in the first quarter didn’t result in a broad market wipeout and there are  sectors and factors that can continue to outperform in this environment.  

Bottom line, the first quarter did contain several negative surprises for investors and  we begin the second quarter with significant uncertainty on trade policies and  legitimate concerns about future economic growth. But there are also positive  factors at work that must be considered, including a still-resilient economy and  looming positive economic policies such as deregulation and potential tax cut  extensions. So, despite depressed investor sentiment, the outlook for the economy  and markets is not universally negative.  

At Trubee Wealth Advisors, we have experienced these types of markets before and  are committed to helping you effectively navigate this challenging investment  environment. Successful investing is a marathon, not a sprint, and through both bull 

and bear markets, we will remain focused on the diversified approach set up to meet  your long-term investment goals.  

Therefore, it’s critical for you to stay invested, remain patient, and stick to the plan, as  we’ve worked with you to establish a unique, personal allocation target based on  your financial position, risk tolerance, and investment timeline.  

We remain vigilant towards risks to portfolios and the economy, and we thank you for  your ongoing confidence and trust. Please rest assured that our entire team will  remain dedicated to helping you successfully navigate this market environment.  

Please do not hesitate to contact us with any questions, comments, or to schedule a  portfolio review.