April 2025 Update on the Economy and Markets

By PJ Williams, CFA, Chief Investment Officer

Chaos reigns across the country, and world, as Trump and Elon Musk implement the start-up mantra of “move fast and break things.” The political right appears to be in full support of the President, while the left is reeling as to how it ended up here. Again, we remain a country divided with Trump’s approval rating hovering at 48% while 46% of those surveyed disapprove of the President’s performance, per the latest poll conducted March 22-25 by The Economist and YouGov.

According to a recent AP poll, the overwhelming majority of Americans agree the government is bloated; rife with wasteful spending, over-regulation and overstaffing. However, the blunt instrument approach with which DOGE is executing its mandate, combined with the overhang of ever-expanding tariffs and trade wars has created uncertainty for investors and corporations alike, while also eroding the confidence of the all-important U.S. consumer.

Lower confidence generally results in lower spending, a tailwind to a slower economy and, if not reversed, to a potential recession. At this point, the economy remains relatively healthy, but consumer sentiment can change quickly, especially on the heels of prolonged periods of uncertainty.

The impact of uncertainty for both the consumer and the investor can be seen in recent market volatility. After reaching a new all-time high on February 19^th following Trump’s inauguration, it took less than a month, and only 16 trading days, for the U.S. stock market to fall 10%. This drawdown pushed U.S. equities into negative territory for the year. Fortunately, most SFG portfolios continue to show positive returns year-to-date (YTD) as of this writing as a result of disciplined asset allocation and diversification.

Note most client portfolios hold multiple asset classes, both domestic and international, including real estate and infrastructure. International stocks have had a strong start to the year while bonds and real assets are positive YTD.

U.S. Stocks experienced a correction. The S&P 500 hit an all-time high on February 19^th before dropping 10% through March 13^th. Stocks have rebounded some since then but remain negative for the year. The correction has reduced the forward P/E ratio to 20x from 22x earlier in 2025. While lower, this ratio indicates stocks are still quite expensive relative to values of the past few decades.

The Federal Reserve kept rates unchanged. As expected, the Fed kept the Fed Funds rate unchanged at their March meeting. Chairman Powell discussed both tariff uncertainty and the potential for an inflation rebound. The Fed, however, still projects two rate cuts between now and the end of 2025 as a result of slowing growth concerns.

Inflation cooled more than expected. Headline inflation (CPI) dropped to 2.8% in February from 3% the previous month, while core inflation dropped to 3.1%. The market had been expecting 2.9% and 3.2%, respectively. The Fed will be watching inflation closely in 2025 to see how potential tariffs or slowing growth affects prices. With that said, the Fed continues to worry about cutting rates too quickly.

Consumer confidence sunk to level not observed since January 2021. According to The Conference Board, “Consumer confidence declined for a fourth consecutive month in March, falling below the relatively narrow range that had prevailed since 2022. Views of current business conditions weakened at close to neutral. Consumers’ expectations were especially gloomy, with pessimism about future business conditions deepening and confidence about future employment prospects falling to a 12-year low.”

Tariffs expected to go into effect on April 2. However, as of this writing, it is unclear which of the proposed tariffs will actually take effect. Markets rallied during the first half of the last week of March as the administration hinted at a narrowing and/or softening of expected tariffs, but this rally was tempered a few days later when 25% tariffs were implemented on automobile imports. It goes without saying that markets generally do not like uncertainty.

Congress passed a seven-month funding bill. The bill caused a divide in both parties as Republicans were not aligned on all of its components and Democrats were upset that some members of their party crossed the aisle to vote with Republicans, thereby avoiding a government shutdown. Primary on the hit parade was Chuck Schumer who spent the next several weeks on damage control after reversing his position. There’s more to come on this front, as the funding bill did not address the debt ceiling which could be reached in the late summer and will require additional action by Congress. Stay tuned.

Geopolitics – The ceasefire in Gaza did not hold, sadly, while a ceasefire in Ukraine remains elusive, despite Trump’s efforts to navigate the crisis. A surprise ceasefire or end to the war in Ukraine could send markets higher in the short term. Meanwhile, Europe has heard the message loud and clear and is unified in increasing its own defense capabilities. This has caused a strong rally in many international defense stocks which has been a tailwind for the overall international stock market.

Equities Update

The U.S. market entered correction territory on March 13^th after a period of increased volatility. The S&P fell 10%, peak to trough from February 19^th to March 13^th while the tech-heavy NASDAQ declined over 13%. Since the most recent bottom on March 13^th, the market has regained a little ground and is down 5% YTD (as of 3/28). In a reversal from last year, the equal-weight S&P 500 index is outperforming the S&P 500 (a market-cap weighted index based on size of companies) driven in part by the fact that technology, by far the largest sector in the S&P 500 index at over 32%, is one of the worst performing sectors this year.

While uncertainty and related market volatility is unnerving, it is important to keep in mind that corrections occur frequently. Below is a chart that SFG has revisited many times over the years showing the average intra-year decline for the S&P 500.

Looking back over the past 45 years, the average annual decline has been 14% per year, peak to trough. It is highly unusual to have multiple consecutive years with 20+% returns in the public markets. Unfortunately, this has become an “expectation” for many investors who now fret over even minor one day declines. With that said, the outlook for the economy has become increasingly uncertain, and consequently, investor sentiment has become increasingly bearish. This can be seen in the latest poll conducted by the American Association of Individual Investors (AAII), though attitudes have improved slightly in recent weeks.

As seen on the chart above, expectations for stock prices over the next six months continue their bearish trend with 52.2% of AAII members reporting a negative outlook. For the 17^th time in 19 weeks, bearish sentiment remains unusually high and above its historical average of 31.0%

While U.S. equity markets continuing to struggle in 2025, international stocks have maintained their strong year to date performance and are now up 7% through March 28.

SFG portfolios continue to be diversified with exposure to international stocks and other asset classes, resulting in positive year-to-date performance despite negative U.S. equity returns this year.

Fed Decision

As expected, the Fed held rates steady during its March meeting, giving markets some comfort that things are proceeding as expected. The Fed’s outlook for the rest of 2025 indicates one to two rates cuts by year end.

The Fed’s dot plot, above, shows the projection by each Fed member for expected rates at the end of 2025 and the subsequent years. While this chart serves as one indicator of expected rate movement for the rest of the year, it is subject to large swings based on new data points in an ever-changing economy. Interestingly, the chart shows several members who do not believe there will be any rate cuts for the duration of 2025. Going out further in time, the range of projections widens, further illustrating the uncertainty and resulting disagreement over where the economy is headed and how the Federal Reserve will react when utilizing its primary tool, the setting of the Fed Funds rate.

In what may end up being a misstep, Chairman Powell resurfaced a word that haunted him and other economists in the lead up to a 40-year high inflation rate of 9.1% in June of 2022 – that is, the term “transitory.” During his post meeting comments, Powell hinted inflation could be “transitory” as a result of tariffs. “And that can be the case in the case of tariff inflation. I think that would depend on the tariff inflation moving through fairly quickly and critically as well on inflation expectations being well-anchored, longer-term inflation expectations being well-anchored.” Bringing back a word that was proved “wrong” in the recent past was a risk for Powell, especially since the definition of what “transitory” actually is remains ambiguous. Should we actually enter a meaningful period of rebound inflation, Powell will be eating these words.

With that said, the Fed indicated the economy is doing “ok” but less well than before, with cracks beginning to show, especially as it relates to consumer sentiment. “Economic activity continued to expand at a solid pace in the fourth quarter of last year, with GDP rising at 2.3 percent. Recent indications, however, point to a moderation in consumer spending following the rapid growth seen over the second half of 2024. Surveys of households and businesses point to heightened uncertainty about the economic outlook. It remains to be seen how these developments might affect future spending and investment. In our Summary of Economic Projections, the median participant projects GDP to rise 1.7 percent this year, somewhat lower than projected in December, and to rise a bit below 2 percent over the next two years.”

The Fed released its latest economic projections following the March meeting. GDP growth expectations declined for 2025, 2026 and 2027 from their December outlook with the median projections falling below 2% for all three years. For 2025, the median projection fell from 2.1% to 1.7%. Alongside these growth projections, the median 2025 inflation projections increased with personal consumption expenditures (PCE) inflation increasing from 2.5% to 2.7% in 2025 and core PCE inflation rising from 2.5% to 2.8% as a result of the potential impact on prices of expanded tariffs.

Inflation and the Economy

Inflation cooled more than expected during February with CPI dropping to 2.8% from 3% the previous month and core inflation moving down to 3.1% from 3.3%. Shelter inflation continues to outpace overall inflation but slowed to 4.2% in February, the smallest annual increase since December 2021. If the administration proceeds with material tariffs on the U.S.’ main trading partners, we would expect inflation to rise. This will be something both the Fed and investors will be monitoring closely. A spike in inflation that does not derail the economy would most likely mean the Fed remains on pause, and perhaps even considers another rate hike. This would be quite the reversal from expectations during the second half of 2024 when as many as four to five rate hikes were being predicted by some economists in 2025.

While inflation did moderate in February, further tariffs and trade barriers could result in a quick turnaround. This uncertainty is exactly the problem for the economy, as consumers and businesses alike are growing increasingly concerned with an inability to spend with any degree of confidence. The Consumer Board’s Consumer Confidence Index fell to its lowest level since January 2021 while the expectations index (looking at the next six months) dropped to its lowest level in 12 years during March. The Michigan consumer sentiment index also continued its downward slide, falling to its lowest level since November 2022.

The risk of inflation and rising uncertainty continue to weigh heavily on spenders of capital, including business leaders. The nonmanufacturing business outlook survey produced by the Federal Reserve Bank of Philadelphia also deteriorated this month. “Nonmanufacturing activity in the region continued to decline, according to the firms responding to the March Nonmanufacturing Business Outlook Survey. The indexes for general activity, new orders, and sales/revenues remained negative, with the former two declining further. On balance, the firms reported a decrease in full-time employment. Both price indexes rose and indicate overall increases in prices. The respondents expect declines in growth overall over the next six months both for their firms and in the region.” Both current and future expectations hit levels that have not been seen in over a decade outside of the initial months of COVID.

Geopolitics

Ukraine

Following the turmoil surrounding President Zelensky’s visit to the White House last month, Ukraine, the U.S. and Russia have spent the month attempting to find common ground on some type of ceasefire. The latest news coming out of these discussions is that the U.S. has reached deals with Ukraine and Russia to open the shipping lanes in the Black Sea and for each country to pause attacks against energy infrastructure. Both Ukraine and Russia are skeptical the other will abide by the terms of the ceasefire, with breaches already being reported. Each side is looking to the U.S. for enforcement.

Middle East

Unfortunately, the ceasefire between Israel and Hamas has not held in recent weeks with Israel resuming its bombing of Gaza. Note this latest event has not only impacted Gaza, but has resulted in massive protests within Israel itself. While it may not change the trajectory of the war, the largest anti-Hamas protest in recent years took place in Gaza last week as well, signaling that the populations of both regions are tired of the fighting. The outcome of this conflict is unlikely to have a direct impact on investment markets, but a resolution may be necessary before Israel can re-engage in mutually beneficial economic arrangements across the Middle East and parts of the Western world.

SFG’s Take:

The Trump Administration is reshaping global alliances and has engaged in the early innings of a trade war on multiple fronts. The combination of changing trade tactics, the blunt instrument approach of DOGE, and perceived risks related to the “rule of law” has many on edge, creating both economic and political instability. The uncertainty for consumers and business leaders has led to a substantial decline in sentiment that could portend a weaking economy, with higher inflation and slower growth. Investors will be watching hard data releases closely in the coming weeks to see if negatively trending sentiment becomes a reality.

U.S. equity markets continue to be expensive relative to valuation metrics, though opportunities remain if earnings growth and strong profit margins can be sustained by companies least affected by tariffs. Given high equity valuations, we believe some areas of U.S. stocks could be subject to quick and sharp pullbacks similar to what was observed in early March. These would focus mostly on the tech stocks that have also been the leader in pulling markets up over the past two years.

Beyond stocks, fixed income looks more attractive than in recent years with investment grade bonds yielding over 5%. Parts of the real estate market also look attractive relative to the past few years though the direction of borrowing costs during 2025 will have an impact on net operating income and valuations for this asset class. SFG continues to believe well diversified portfolios, including alternative investments, are appropriate for most clients and have been the reason most SFG portfolios remain positive YTD.

We encourage our clients to separate geopolitical news from fundamental market data. While one can beget the other, it is most often economic data itself that impacts markets long term. With that said, market sentiment (whether justifiable or not) does impact markets in the shorter term. We, therefore, project a period of increased volatility. Heightened risk factors make it imperative that an investor be in the correct risk tolerance for their own personal situation. If you have concerns or want to revisit your current strategy, please do not hesitate to reach out to your wealth advisor.