April 2025 Monthly Commentary

MARKET OVERVIEW:

April 2025 was a month marked by significant economic turbulence and market volatility. The confluence of disappointing economic data, trade policies, and investor uncertainty led to continued declines in equity markets and heightened concerns in some sectors of fixed income. Corporate earnings seasons kicked off with logically ambiguous expectations given tariff negotiations. Safe havens such as gold (up 5.3% in April) and short-term government bonds provided a continued hiding place for investors shunning risk markets. The major catalyst for market jitters came on April 2nd, “Liberation Day”.  President Trump’s aggressive reciprocal tariffs roiled markets, dropping the Dow Jones Industrial Average by over 3,600 points in 48 hours. A few days later, a pause on most of the tariffs (except China) led to the reversal of many of the losses.

EQUITY MARKETS PERFORMANCE:

In April, U.S. equities finished slightly lower in total return as the volatility rose, then eventually subsided as the month unfolded.  Earning seasons kicked off, and despite many industries pulling forward guidance, some firms posted solid numbers and were confident in their 2025 outlooks. This helped the “tech heavy” Nasdaq to rebound somewhat from a disastrous March. In fact, with the tech sector up 1.62% for the month, Nasdaq was able to post a slightly positive return of +0.88%.  Industrials were led lower by the energy and healthcare sectors (lower by -13.65% and -3.7% respectively).  Oil dropped by almost 18% as supply issues, along with economic uncertainty, drove the commodity lower.  Industrial and utility sectors were mostly flat, but the Dow Jones Industrial Average continued to slide (-3.08%) and the SPX fell by -0.66%.

FIXED INCOME MARKETS PERFORMANCE:

Fixed income markets also faced challenges last month.  Short-term Treasuries continued to provide a haven for investors. Yields declined in the short and intermediate parts of the curve, as investors anticipated future FOMC action from the economic fallout from trade policies.  Conversely, longer term Treasuries endured a roller coaster ride as concerns over fiscal deficits, tariff induced inflation, and the possibility of foreign central banks selling treasuries to punish the United States.  In addition, some of the new Treasury supply was met with weak demand, and auctions “tailed”.  In all, the US yield curve ended the month steeper and mostly lower in yield, led by the 2–5-year sector.  The US Treasury 2-year note dropped by 28 basis points to yield 3.88% at month end.  The US 10-year note fell by only 4 basis points to yield 4.20%.  As mentioned, the volatility in longer durations was intense. The benchmark 10-year note reached a low yield of 3.86% on April 4th after the tariff announcements, rising to over 4.58% just one week later. Rumors swirled over foreign bank selling of US Treasuries, and the weakening US dollar brought into question whether the United States would remain the “reserve currency” going forward. 

Investment grade corporate bonds underperformed government bonds by a relatively wide margin, as risk premium spreads soared in conjunction with equity market volatility.  Aggregate corporate bond returns were slightly negative (-0.03%), while government bonds had a positive return (+0.69%). Both duration and credit quality mattered within the sector, as intermediate corporate bonds returned +0.66% and longer corporate issues fell -1.23%. Quality outperformed as of bonds with credit quality of AA returned +0.50%, while bonds with a BBB rating returned -0.21% for the period. Overall, investment grade spreads widened by 15-20 basis points versus Treasuries, continuing the trend from March and causing relative underperformance to government bonds by over 100 basis points year to date.

The securitized market was positive for the month (+0.33%) but also underperformed the Treasury market. The MBS market was positive during April, but slightly below treasury returns as spreads also saw pressure from rate volatility and failed to keep pace with their US Treasury counterparts.  

Tax free municipal bond prices fell for the second month in a row, and performance has been negative for broad duration municipal portfolios in 2025. Intermediate mandates have performed better, and overall ratios of tax-free bonds have become more attractive.  Retail investors sought liquidity, and tax-exempt mutual funds and ETFs continued to see outflows.  With tax season over, coupled with supportive seasonal technical factors, many are anticipating prices to rebound. The higher education sector saw some specific pressure as President Trump warned of pulling government funding.

KEY DRIVERS OUTSIDE OF TARIFFS:

1. First-Quarter GDP Contraction

The U.S. economy contracted by 0.3% in the first quarter of 2025, marking its first decline in three years. This downturn was primarily attributed to a record 50.9% surge in imports as businesses rushed to bring in goods ahead of anticipated tariffs. The trade deficit alone shaved -4.8 percentage points off GDP. Consumer spending, which had spiked in late 2024, slowed significantly, increasing by only 1.8%. The decline in spending was partially due to harsher winter weather, the post-holiday spending lull, and consumers conserving cash. Business investment remained robust, primarily due to companies stockpiling inventory and equipment ahead of anticipated tariff-related price hikes, which contributed positively to GDP. However, economists foresee a slowdown in the second quarter due to shrinking imports, reduced inventories, and waning confidence. Government spending also dragged down the economy as a result of federal budget cuts and layoffs. Inflation rose to +3.6%, although more current data suggest a lower rate around 2.5%. With ongoing trade disputes causing market uncertainty and an anticipated increase in inflation, analysts are warning of higher risks of recession. The Federal Reserve is still expected to hold interest rates steady amid concerns of balancing potentially higher inflation against the prospects of slower growth. 

2. Inflation Pressures Persist

Inflation remained elevated, with the core Personal Consumption Expenditures (PCE) price index rising +0.3% month-over-month and 2.6% year-over-year in April. This persistent inflationary pressure, above the Federal Reserve's 2.0% target, complicated the economic outlook and further contributed to market volatility. ​

3. Weak Employment Data

The ADP private payrolls report for April showed a gain of only 62,000 jobs, half of the anticipated pace, signaling a slowdown in labor market growth. This weak employment data, coupled with declining job openings and rising unemployment claims, raised concerns about the sustainability of consumer spending and economic expansion. ​

4. Widening Trade Deficit

The U.S. trade deficit widened significantly in early 2025, driven by increased imports ahead of new tariffs. This imbalance contributed to the contraction of GDP and added to concerns about the long-term effects of trade policies on economic growth.

KEY TAKEAWAYS:

Market volatility will likely continue as investors weigh the risks of inflation, interest rates, and slower economic growth.  Industries will need to react to tariff policy as negotiations continue. Stagflation is a real risk to the US economy, and the consumer and markets could adjust quickly which likely brings the FOMC back into the picture.  Expectations for rate cuts continue to increase as evidenced by the short-term bond markets. The US Treasury Department has also made it clear that it wishes to see a lower US 10-year Treasury note to help spur further home ownership.

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