What a volatile month. As April began with “liberation day,” where Trump outlined his tariff policy, the market, already in a downtrend, sank like a brick in the days following the announcement. The S&P 500 declined close to 12% in 5 days. U.S. Treasury yields spiked, and the dollar dropped as investors ran for the exit across major U.S. asset classes. The pain in the bond market perhaps spoke volumes about the policy decisions, implying a lack of confidence in the historically perceived stability of the U.S.
Possibly reacting to the bond market, the Trump administration announced a 90-day moratorium on the hefty tariff announcement just the week prior. Stocks rallied over 8% on this announcement. Volatile indeed. Moves of this magnitude are highly irregular, and such moves point to heightened uncertainty as a result of the on and off nature of Washington’s evolving tariff policy. The market then took another leg down, shedding another 6% in the ten days following the relief rally.
Trade talk dominated the news line, and the back-and-forth nature of these policy decisions caused a lot of concern to market participants. As the administration announced that negotiations were underway, and that many countries reached out to inquire how to reduce the proposed tariffs, the market took calm in the backpedal and hopeful positive implications of said negotiations. The S&P rallied from April 21 to the end of the month, recovering most of the post liberation day declines. Almost a full round trip of a significant magnitude in what was an extremely long and historical month of market action.
For the month, the S&P declined less than 1%. Value (VTV), while less volatile during the month, didn’t keep up with the month-end surge and closed the month with a 2% loss. Growth (QQQ), while leading to the downside at the beginning of the month, surged more than the broad market and ended the month up over 1%. The rest of the developed world (CWI) was the clear beneficiary of the selling of U.S. stocks, gaining close to 3% for the month. Bonds were up fractionally.
ECONOMIC CONSIDERATIONS
The initial shock from the tariff announcement sent waves through the financial markets. The fact that not only the stock market experienced heavy declines, but the treasury and currency markets sell off implied concern about the world’s perception of the safety of U.S. investments. Typical during stock selloffs is a “flight to quality”, where institutions selling stocks usually buy U.S. bonds, historically deemed a “safe haven”. In this instance, both U.S. stocks and U.S. Treasuries were sold off, suggesting foreign (and even domestic) market participants began to shy away from U.S. investments. Add that foreign markets saw in inflow of funds to their markets suggests and it’s pretty clear that global investors are preferring to allocate investment capital outside of the U.S. This on its own in concerning, as theoretically the past years relative strength of the U.S. stock market was a function of foreign investors preference in investing in the U.S. at the exclusion of other countries stocks. This reversal in sentiment could have long-term adverse repercussions to foreign investments in our country unless the U.S. can convince the world that we are still a beacon of safety. Reputational damage may be the toughest aspect from which to recover.
Almost every Q1 economic metric announced throughout the month reflects a slowdown and a more cautions posture in the face of economic uncertainty.
Consumer sentiment continues to make multi-year lows. Job openings continued to fall towards post-covid levels. Business investments have been put on pause. With the rules changing daily, it becomes exceedingly difficult to confidently project the state of the future.
The start to earnings season has mostly been in line with expectations, but earnings are backward looking and are reflecting a period prior to liberation day. Corporate guidance has frequently been skipped, as there is very little forward visibility due to a lack of understanding of what the tariffs will ultimately mean on their bottom line, let alone what levels of tariffs will endure during these negotiations. However, so far, consumers have continued to spend at similar levels in recent quarters. Perhaps there is some “pull forward” in spending to get in front of likely higher prices due to tariffs.
First quarter GDP was -.03%, the first contraction since 2022 which increases the odds of a recession in 2025. However, parsing through the GDP data showed a surge in imports, which offset the muted positive domestic productivity. The consumption component of the GDP data reflected sustained consumer spending, but again likely a front load of goods before tariffs kick in. Government and business spending contracted slightly. The market initially sold off 2% on the print, but a grind higher throughout the trading day resulted in a shrug off of bad data due to the outsized impact of the surge in imports.
Stock prices are influenced less by whether things are good or bad but more so whether they’re getting better or worse. We suspect the rally over the past weeks is based on the tariffs situation becoming better than initially feared. That Trump has backpedaled somewhat, paused for 90 days, indicated ongoing negotiations with trading partners, as well as unemployment and consumer spending holding its ground, would imply an improvement in sentiment from the worst-case scenario from the April 2 announcement.
However, we are taking the position that the market can only advance so much. Remember a few months ago we spoke to the fact that market valuations were above its historical average. We find it hard to support the case that those stretched valuations are warranted given the evolution and highly likely negative impact of higher tariffs. Thus, there is still substantial risks to the downside as the economic impacts of the tariffs have yet to show up in the economic data. We believe caution is still warranted.
PORTFOLIO ADJUSTMENTS
To start the month, portfolios showed a diversified strategy with a focus on both growth and stability. Notable holdings included significant allocations in SPLG (S&P 500), RPV (value) and IEV (Europe). High risk positions such as emerging markets and small cap stocks were proactively excluded. The overall risk profile was moderate, with a beta relative to the S&P at 70%, laying the groundwork for growth while managing risk.
Subsequent to the early month declines, allocation to Europe was increased, reflecting positive sentiment towards developed international equities. Conversely, QQQ’s weight dropped substantially. The overall volatility and beta metrics remained stable, with slight adjustments suppressing risk exposure amidst market fluctuations.
By the end of the month, IEV was buttressed with other international funds, PIZ and EFG as a position benefiting from growth in emerging and developed markets. Allocation to S&P 500 remained fairly consistent, while volatility slightly decreased. Despite ongoing market challenges, a focus on a diversified selection alongside maintaining lower beta levels reflected an approach to buffer against future economic headwinds. Overall, portfolios were positioned strategically from enhanced diversification and an established defensive posture that reduced overall risk while maintaining return potential.
Also during the course of the month our cash position was initially increased, amounting to approximately 20% of the equity sleeve as the market cratered. As the market rebounded on the 21st and started to recover, cash was re-invested into equities to capitalize on positive upward movements in the stock market.
LOOKING AHEAD
The outlook in the intermediate term is murky at best. In the near term, we feel that the market can continue its grind higher based on ongoing trade negotiations and the perception that deals favorable to the U.S. can be made. Again, if the market senses that there is an improvement in tariff considerations, then sentiment can keep the market elevated, notwithstanding risks that may lie ahead.
In the intermediate term, we need to have a better understanding of where tariffs will settle, to better understand the economic implications thereof. We hope that this happens sooner than not, as the high degree of uncertainty is likely to keep volatility elevated.
Unemployment is still low, at 4.2%, which should, on its face, support a similar level of consumption in the past that has enabled earnings growth. Inflation has stabilized, at least if and until the cost of the tariffs are reflected in the cost of goods. The Fed is on hold as it awaits additional data on the health of the labor market and the potential inflationary impacts of tariffs. The U.S. economy, while slowing somewhat, is still exhibiting a surprisingly high degree of resiliency.
What will be very important to follow in the upcoming months is what economic impact will result from the current level of tariffs. It’s hard to imagine that in a world with higher tariff levels there will not be some amount of erosion to corporate earnings or consumer purchasing power. In the months ahead, most of the economic data that will be reported will start to factor in the impacts of tariffs. We believe this will drive market sentiment and direction in the months ahead.
It’s too early to determine the immediate future economic impact from these tariffs, the rally off the lows have been fierce, but on low volume. Bear market rallies are common, and until we know more about the tariff levels, caution is still warranted.
We’ll continue to ebb and flow with the movement of the market, and can just as quickly de-risk the portfolio should another downturn arise. However, if the worst is behind us, or the market can shrug off any adverse implications from the tariffs, we are well positioned to move higher along with the market.
As always, should you have any questions or concerns, we are here to talk.
