In light of a volatile start to the year for the markets, the benefits of a diversified investment strategy were on display as positive returns in bonds and international stocks offset a 4.2% decline in the S&P 500. Data points measuring the broader economy were mixed, including a February jobs report that paired good job creation with a rising unemployment rate. Market expectations were high coming into the quarter following two consecutive years of 20% plus returns for U.S. stocks. Share price strength had been led by the “Magnificent 7” technology companies that have grown to represent a third of the overall market. However, market sentiment towards technology stocks and the Artificial Intelligence (AI) investment theme soured, as some analysts suggested a potential bubble was forming around former market darlings including Microsoft, Apple, and Google.
A topic unique to the recent market turmoil has been the sudden weakness in the U.S. dollar, historically a beacon of strength in its role as the world’s reserve currency. Much of the dollar’s decline can be attributed to President Trump’s tariff threats. As the trade levies were activated on April 2nd, investor sentiment turned negative as concerns about a recession, higher inflation, and full-fledged trade wars increased. In response to the weakening dollar, investors have been gravitating towards safe-haven asset classes such as gold, in turn pushing the market price of the metal above $3000 an ounce.
Harking back to the summer of 2022, 9% inflation was a headline story. Today, price levels are still a cause for concern in the U.S. economy, as both the Producer and Consumer Price Indexes continue to rise at high rates (3.5% and 3%, respectively, in the recent January report). Looking at the economy more broadly, investors are seeing signs of softness after enjoying solid U.S. GDP growth of 2.8% in the fourth quarter. Additionally, building permits and housing starts in the real estate market continue to slump, while manufacturing activity has been a lone bright spot.
Wall Street is on edge as we shift from post-election bullishness to concerns over a potential global economic recession. The U.S. stock market has quickly transitioned from all-time highs in February to the brink of a bear market, resembling the sharp stock selloffs during 2022 (-28%) and 2020 (-35%). While investors may be hoping for an imminent market rescue from the Federal Reserve, the Jay Powell-led central bank may not provide interest rate cuts this time due to their existing concerns around inflation.
Looking ahead, we will be closely monitoring market fundamentals as we seek to both manage market risk and evaluate investment opportunities. Recent communications from the nineteen members of the Federal Open Market Committee (FOMC) forecast lower GDP growth of 1.7% in 2025, while first quarter consensus earnings forecasts have featured analyst downgrades. An additional reading from the Conference Boards’ Consumer Confidence Index also registered at the weakest level since January 2021, portraying a U.S. consumer weighed down by near term economic concerns.
