Overview
In the first quarter of 2025, global markets navigated a landscape marked by significant policy shifts and economic indicators. The U.S. economy began the year with many economists predicting a projected growth rate of around 2%. However, the introduction of new tariffs and the threat of an international trade war introduced a wave of uncertainty, leading to market volatility and concerns over potential retaliation from trading partners.
Looking beyond the United States, the global economic outlook presented a mixed picture. While advanced economies like the Eurozone faced challenges—including sluggish industrial performance and political uncertainties—developing and emerging markets showed resilience.
Countries in Emerging Asia, such as India and Vietnam, continued to experience robust growth driven by strong domestic demand and investment. However, China’s economy faced headwinds from ongoing trade tensions and a sluggish property sector, leading to a moderated growth forecast. Overall, the interplay of aggressive trade policies, geopolitical tensions, and varying regional economic performances underscored the complexity of the global market landscape in the first quarter.
U.S. Macroeconomics Data
The Federal Reserve maintained interest rates between 4.25% and 4.5% during the period, holding off on rate cuts as it continues to monitor economic data. Investors anticipated potential rate cuts in 2025, but tariffs, inflation, and other macroeconomic factors have complicated this outlook. This uncertainty has not been well received by investors, as is evident in the VIX “Fear Gauge” CBOE Market Volatility Index, which increased 28.41% in Q1 2025.
The U.S. inflation rate was volatile throughout the quarter, initially rising to 3.00% in January and then declining to 2.82% in February. Throughout Q1, the labor force participation rate remained stable fluctuating between 62.4% and 62.7%. The Federal workforce witnessed significant reductions across multiple departments. The unemployment rate decreased to 4% in January with a slight increase in February to 4.1%, which aligned with market expectations.
The U.S. Producer Price Index (PPI) exhibited varied movements from shifts in inflationary pressures. In January, the PPI increased 0.6% MoM surpassing the anticipated 0.3% rise. This increase is attributed to significant prices such as a 44% surge in egg prices. On an annual basis, January PPI rose 3.7%. In February, PPI remained constant month over month and rose 3.2% annually.
The U.S. dollar experienced a notable decline in Q1 2025 due to trade policies and shifting investor sentiment. The introduction and implementation of new tariffs by the U.S. administration heightened fears of a global trade war and undermined the USD’s traditional role as a safe haven asset. As the U.S. dollar fell 3.96%, gold reached all-time highs over $3,100 with a quarterly gain of 18.8%.
Global Market Performance
- Global markets were down -1.32% in the first quarter of 2025.
- U.S. markets lagged dropping -4.51% in Q1 2025. The U.S. decline can be largely attributed to concerns over impending tariffs and their economic impacts. Investors are closely watching the impact that these tariffs have on inflation and how The Fed will react. Consumer Discretionary was the worst-performing sector losing –11.75%. The technology sector, which has dominated the U.S. market returns for the past decade, experienced a downturn of –11.05% in Q1 2025. The Energy and Health Care sectors rose 9.94% and 6.54% limiting the total U.S. market loss.
- International Developed markets experienced a gain of 20% in Q1. International markets grappled with growth prospects and uncertainties surrounding U.S. trade policies. European equities were driven by increased defense and infrastructure spending. Investor sentiment improved across Europe mostly in Germany, which experienced significant gains during the quarter. The STOXX Europe 600 outperformed the S&P 500 by 9.8%.
- Emerging Markets rose 2.93% and faced challenges from being significantly impacted by the U.S. tariffs and trade protectionism. Industrials sectors and metals were sensitive to these conditions.
Global Investment Factor Performance
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U.S. Investment Factors experienced mixed performance in Q1 2025. Markets were very volatile because of the uncertainty of tariffs and their economic impact. Minimum Volatility provided the best performance gaining 5.86%. Value also outperformed rising 2.91%. Momentum and Quality provided protection losing –1.88% and –2.91%. U.S. Small caps fell –7.75%.
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International Developed factors all experienced positive performance. Value was the best-performing factor gaining 10.50% and outperforming the market by 4.15%. Minimum Volatility also outperformed the market rising 9.15%. Momentum gained 5.83%. Size and Quality performed similarly gaining 3.53% and 3.51%.
- Emerging Markets Value gained 4.42% in Q1 2025 and outperformed the market by 141 bps. All other factors experienced negative performance in Q1.
Bond Market Overview
- U.S. Treasuries had a strong quarter as falling yields boosted bond prices. Bond prices rise when the yield falls and vice versa. As stocks decline, investors tend to gravitate toward safer assets (bonds). Investors are closely watching The Fed as potential interest rate cuts in 2025 would put downward pressure on Treasury yields and increase bond prices.
- However, Municipal bonds experienced outflows amid concerns about the potential change to their tax-exempt status as Congress may consider eliminating this benefit to fund the extensions of previous tax cuts. Municipals are still appealing to high-net-worth clients due to their lower risk and current tax advantages.
- U.S. Treasury yields decreased notably during Q1 reflecting a shift toward safer assets as trade tensions heighten and tariffs have been implemented. This movement indicates investors are concerned with potential economic slowdowns resulting from these policy changes.
- The U.S. investment-grade bond spreads hit 94 bps on March 12, 2025, their widest level since September 18, 2024 according to the ICE BofA Corporate Index. High-yield spreads widened to 322 bps, which was also the widest since September 18 according to the ICE BofA High Yield Bond Index. Rising spreads indicate increased borrowing costs for U.S. companies, which can hurt profitability. Spreads are overall still near historic lows.
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