APRIL 2025 MARKET INSIGHTS

By: ANTHONY MINOPOLI, PRESIDENT & CHIEF INVESTMENT OFFICER

The first quarter of 2025 is in the books. A combination of business travel and waiting on Trump tariff talk to sit down and pen this month’s essay. The Bloomberg 1000 returned -5.87% for the month as investors worried about inflation and the impact that tariffs could have on the stock market[1]. Small cap stocks had a more difficult time during March as evidenced by the Bloomberg 2000’s total return of -6.92%[1]. In general, the broad equity market was looking for a more benign environment from President Trump. Investors came into the second Trump presidency with a thought that his focus would be on lessening taxes and regulation, and that these two factors would be enormously positive for stocks.

The reality of the early months of the new administration is that the war in Ukraine shows no signs of abating. The situation for Israel and the Gaza Strip remains very tense and domestic economics have now been dominated by the impact that tariffs may have on inflation.

When we shift our focus and look at the bond market, it has been a fairly volatile year. We ended 2024 at a yield of 4.57%, peaked at 4.79% on January 14^th and stood at 4.21% as of March 31^st^[1]. As I pen this essay late in the day on April 2^nd, the 10-year Treasury is yielding 4.13%[1]. The Bloomberg Aggregate Bond Index returned 0.04% for the month1. On March 3^rd, the 10-year Treasury stood at 4.16% and ended the month of March at 4.21%[1]. Slightly elevated rates and widening credit spreads caused the flattish return for the month.

We have been watching the back and forth on the tariff talk and the greater issues covering the economy. As regular readers know, we felt that the root causes of the current inflationary environment were not rooted in transitory issues. After inflation peaked at over 9% in 2022, it fell precipitously until the decline in inflation stopped. Economics is all about linkages. We are focusing on the linkages between inflation, employment, and spending.

As we know, inflation remains above the Fed’s desired range. The employment market has been a mixed bag this year. Unemployment and underemployment have both ticked up and currently stand at 4.1% and 8.0%, respectively[1]. Today we saw the ADP Employment release show new job creation of 155,000 and this eclipsed the consensus estimate by 35,000 jobs[1]. Last month was revised upward by 7,000 jobs and this shows some surprise strength in the job market. The recent employment statistics stand in stark confidence to Consumer Sentiment. The Consumer Sentiment Survey published by the University of Michigan ended 2024 at 74.0 and fell to 57.0 in March[1]. In general, consumer spending has been under pressure when looking at credit card data provided by Citibank and Bank of America.

Considering these linkages, if inflation remains stubborn and does not move to the Fed’s desired range, it is likely that the Fed will need to keep the Federal Funds rate at an elevated level in order to keep inflation from becoming rampant once again. At the same time, if consumer confidence and spending remain pressured, that is a problem for the overall economy because two-thirds of our economy is driven by consumer spending. The linkage that is at odds with this scenario is employment. We will be doing more digging into the employment statistics to understand the quality of the jobs being produced. Also, over the years there have been numerous times where the ADP Employment statistics are not in sync with the government releases on non-farm payroll and unemployment. Those statistics will be released later this week and will give us a clue as to whether the employment market is tracking differently than inflation, consumer sentiment, and spending.

We are looking to see if employment is breaking down, and coupled with elevated inflation, creates a stagflationary environment. However, if employment is strong and causes a rebound in consumer sentiment and spending, this could put us on a solid growth trajectory. Under this scenario, the Fed can directly attack inflation because the employment market could withstand the Fed’s pressure on inflation. A lot of moving parts.

And then came the tariff announcement late on April 2^nd, the so called “Liberation Day” as announced by President Trump. The President announced a baseline tariff of 10% on all imports and there could be even higher rates for countries the administration deems to be bad actors. The equity markets closed higher on April 2^nd based on a belief that there would be some compromise. Futures are showing a complete reversal of these gains for tomorrow. It is impossible to consider how to trade and position for these short-term moves because as we have stated, these tariffs can be removed as quickly as they were put in place.

In a recent CIO Corner post, we shared research on how the U.S. remains the most freely traded economy when factoring in the combination of actual tariffs and other barriers to entry that serve as de-facto tariffs. This change in the U.S. posture still keeps us as an easy market to trade with. Some of the companies that import goods into the U.S. may see their cost structures increase, and these will ultimately be passed onto the consumer. Everything I said earlier about the linkages in the economy will be impacted by the tariffs and the attitude of consumers towards the tariffs. We expect more short-term volatility but are trying to decipher the long-term path. That, as of now, has not been revealed.

Until next month.

[1] Source: Bloomberg

A portrait of Anthony Minopoli wearing a dark suit, white shirt, and red tie.