The year started as 2024 ended, with uncertainty around economic policies and priorities, accompanied by a healthy dose of volatility. The initial enthusiasm of a pro-growth agenda was wiped away by confusion surrounding tariffs. Despite starting the year up 4%, the S&P 500 finished the quarter lower, as did all major indices.
Market Performance
The first half of the quarter was buoyed by optimism around the constructive elements of the Trump administration, including de-regulation and tax cuts. From Election Day through February 19th, the S&P 500 experienced a 5.7% rally. The back half of the quarter brought noise on the policy front, in particular tariffs. The uncertainty around the end game and the potential impact on economic growth weighed on investors, consumers, and businesses. As a result, the index dropped 10% from the intra-quarter high. For the quarter, the S&P 500 declined by 4.3%, including a 5.6% tumble in March.
The tech-heavy Nasdaq, which drove much of the market gains in 2024, reversed course and fell by 9.6% for the quarter and 7.4% for the month of March. The Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia, and Tesla) declined by 15% over the first three months of the year after collectively returning 156% over the previous two years. Their might, roughly 1/3rd of the weight of the S&P 500, dragged the other 493 constituents of the S&P 500 into negative territory, even though those stocks were up 0.4% on the year.
Mid and small caps didn’t fare any better. Mid caps were down 6% for the quarter and 5.5% for March. Small caps fell 9% and 6% over the same respective timeframes. Uncertainty over the economy and future trajectory of potential Fed rate cuts weighed on investor sentiment. Consumers, the engine of the economy, were spooked about the potential of a recession and the possibility of accompanying layoffs. The Consumer Sentiment Index fell to its lowest level for three years, and the third lowest over the past decade and a half.
For the first time since 2010, international outperformed US stocks. The global foreign equity index was up 5% to end the quarter on the back of a weakening dollar and concern over domestic policies. Increases in spending on defense and infrastructure in Europe and strengthening fundamentals proved a tailwind for the sector.
Bonds were also a bright spot in a tough quarter. The Bloomberg US Aggregate benchmark was up 3% to start the year as the 10-year treasury yield fell from a high of 4.8% in January to a low of 4.1% to end March, as the flight to safety drove bond prices up and yields down.
Unknown Unknows Persist
Last quarter we discussed how even though we knew who would be helming the county, there was still uncertainty around how their objectives would impact the economy in the medium and long term. While that persists, new short-term concerns have surfaced much faster than expected, including escalating trade wars, questions about Fed independence and the dollar as a haven currency. Understandably, there is heightened concern about the path forward for the U.S. economy and how it will affect markets. And while there is no out-of-the-box solution, what investors can do is ensure that portfolios align with long-term objectives.