May 2025
US Economy: Ambivalent data.
For the first time since 2022, U.S. GDP shrank by 0.3% in the first quarter due mostly to a 41% surge in imports as businesses and consumers stocked up to front-run the Trump tariffs. Consumer spending climbed +0.7% in March, driven by big-ticket items (+8% increase in car sales). Good news on inflation (core PCE was unchanged in March) was offset by plummeting consumer confidence, which sank in April to the lowest reading (86) since May 2020, a negative harbinger for the U.S. economy, which relies heavily on consumer spending.
US Stocks: Volatile situation.
U.S. equities ended April mostly lower except for large-cap growth (+1.7%). Given that the S&P 500 was down more than 10% on April 7, finishing the month essentially flat shows just how volatile the markets have been. Uncertainty about tariffs and U.S. policy in general, less potential for lower interest rates and higher potential for inflation, and a slowdown in hiring all contributed to an economically sensitive reality for U.S. equities for the foreseeable future. Sector performance told a similar story, with tech stocks eking out a 0.9% gain in April.
Foreign Stocks: Tariff tailwinds.
As has been the trend since the end of 2024, equities in developed markets again outperformed the U.S. in April. The boost came from a weakening dollar and the 90-day pause on country specific tariffs for all countries but China. German stocks finished April up 7.5% after being down more than 9%. Alongside Germany, Japan (+ 5.2%) benefited from Trump directives to reduce the tariff burden on global automakers. Mexico (+13.0%) led the emerging markets due to its potential to end up relatively well-positioned from the tariff tussle.
Fixed Income: Quite the month.
After a sharp selloff in reaction to the U.S. tariff announcements, U.S. Treasuries finished April in the black. While U.S. interest rates remain generally below where they began 2025, bond market volatility appears likely to linger, especially if the tariffs stoke near-term inflation and curtail the Fed’s willingness to lower interest rates. Municipal bond yields continued to rise in April on higher issuance, tax-season selling and budget uncertainty; in terms of relative yield, munis look compelling relative to their historical relationship with Treasuries.
Real Assets: Real returns.
Infrastructure equities (+3.7% in April) continued a strong start to 2025, benefitting from tariff uncertainty and the potential for U.S. reshoring and reindustrialization. Gold also continued to gain (+5.4%) while oil was hit hard (-17.8% in April) on concerns that tariffs would hamper economic growth and reduce demand for fuel, coupled with Saudi Arabia signaling an increase in production to gain market share. Lower oil and gas prices may help consumers offset some of the cost increases due to tariffs.
Alternatives: Credit kicker.
Amid volatile markets, hedge funds served their role as risk mitigators, generally posting positive returns so far this year. Absolute return strategies were up 0.3% in April while most of the U.S. equity markets struggled. Private equity capital remains “stuck” due to relatively high U.S. interest rates, economic uncertainty and geopolitical unrest driving an extended slowdown in new investment and exit activity since 2023. Investment activity in 2024 was up modestly for the year, a positive sign that will need to continue to “un-stick” markets.
Source of data: Bloomberg
Equities Total Return
| APR | YTD | 1 YR | |
|---|---|---|---|
| U.S. Large Cap | (0.7%) | (4.9%) | 12.1% |
| U.S. Small Cap | (2.3%) | (11.6%) | 0.9% |
| U.S. Growth | 1.7% | (8.4%) | 14.1% |
| U.S. Value | (3.1%) | (1.5%) | 8.1% |
| Int’l Developed | 4.6% | 11.8% | 12.6% |
| Emerging Markets | 1.3% | 4.3% | 9.0% |
Fixed Income Total Return
| APR | YTD | 1 YR | |
|---|---|---|---|
| Taxable | |||
| U.S. Agg. Bond | 0.4% | 3.2% | 8.0% |
| TIPS | 0.1% | 4.3% | 8.1% |
| U.S. High Yield | 0.0% | 0.9% | 8.7% |
| Int’l Developed | 1.4% | 0.1% | 1.9% |
| Emerging Markets | 1.5% | 2.5% | 9.2% |
| Tax-Exempt | |||
| Intermediate Munis | (0.3%) | 0.4% | 3.0% |
| Munis Broad Mkt | (0.6%) | (1.1%) | 1.9% |
Non-Traditional Assets Total Return
| APR | YTD | 1 YR | |
|---|---|---|---|
| Commodities | (4.8%) | 3.6% | 4.1% |
| REITs | (2.0%) | 0.7% | 16.3% |
| Infrastructure | 3.7% | 8.5% | 23.9% |
| Hedge Funds | |||
| Absolute Return | 0.3% | 1.4% | 4.6% |
| Overall HF Market | (0.4%) | 0.1% | 3.5% |
| Managed Futures | (4.5%) | (6.9%) | (13.0%) |
Economic Indicators
| APR-25 | OCT-24 | APR-24 | |
|---|---|---|---|
| Equity Volatility | 24.7 | 23.2 | 15.7 |
| Implied Inflation | 2.2% | 2.3% | 2.4% |
| Gold Spot $/OZ | $3288.7 | $2744.0 | $2286.3 |
| Oil ($/BBL) | $63.1 | $73.2 | $87.9 |
| U.S. Dollar Index | 124.5 | 123.8 | 122.5 |
Our Take
Despite the 90-day U.S. pause on country specific tariffs, uncertainty is likely to dominate the markets for months. A wait-and-see mindset, slowing growth and a potential goods shortage similar to that during Covid are all headwinds as the 10% global tariffs and much higher China tariffs remain in place. While the scope of the tariff announcements has been global, it is now shaping up to be primarily a U.S. trade war with China.
In the short-to-intermediate term, the bar is low for announcing wins or deals that can turn markets around if deemed positive. While actual trade deals can take 18 months, on average, to negotiate and nearly four years to implement, we see a high likelihood of “deals in principle” being announced with the details to be worked out over time. We have yet to see the actual impact of tariffs in real economic data but that is forthcoming. With that said, the second and third order longer-term effects of the Trump approach to trade policy remain to be seen.
We view the U.S. tariffs as an acceleration of the thesis we put forth in January 2022, the ongoing shift toward an increasingly multipolar world that can no longer support historically low interest rates and inflation. (See our Q2 Economic Commentary for more on this and the implications.)
As we head further into the second quarter, here are the key market drivers we are tracking closely:
- U.S. economic data. The U.S. economy appears stable, although weakening. Inflation has remained stubborn but largely in check. The end of U.S. exceptionalism is now being debated (prematurely, we believe), and concerns regarding the U.S. dollar losing its global reserve currency status seem exaggerated for the foreseeable future.
If tariffs remain at current levels, the estimated drag on U.S. GDP is 1%-2%, of which more than half would be due to uncertainty. If deals are struck or the 90-day pause (or a version of it) becomes permanent, uncertainty is likely to dissipate (if only for a limited time as tariffs may be an on/off switch used by the Administration), and the focus could then shift to the pro-growth policies the Trump administration has promised – deregulation and tax cuts.
- Tariff negotiations. The tariff showdown was triggered by the U.S. government, meaning a reversal is largely in the hands of the Trump administration. A sharp spike in Treasury yields was quickly followed by the pause on reciprocal tariffs on all countries except China until July, evidence that bond market movements can influence the U.S. policy trajectory. Again, the potential for deals in principle could be a positive catalyst for markets as rumors of progress with countries such as India, Japan and South Korea indicate the possibility for near-term announcements.
The 90-day pause on tariffs helped diffuse the magnitude and breadth of a global trade war. But ongoing positive news about trade negotiations is critical to maintain market stability and begin reducing the uncertainty risk premium. At press time, news outlets have reported that the Trump administration is focusing on Asia outside of China. There are indications of high-level negotiations with India, a country of great strategic and economic importance with which the U.S. does not currently have a trade deal. A trade deal with India would further isolate China and could be a big win for U.S. corporations seeking to diversify their outsourcing. - Bond yields and bond market volatility. We believe the bond markets are often the best early indicator of potential market turbulence. During the week of April 7-11, the yield on 10-year U.S. Treasury bonds soared 70 basis points (intraday), a historically rapid increase. This stoked fears of foreign investors and central banks selling off U.S. Treasuries.
Our conversations with managers indicate this fear may have been overblown as the selling was likely mostly due to rebalancing and technical/deleveraging reasons. The U.S. Treasury auction on April 7 appeared to have strong foreign investor demand. Bond yields have since stopped rising and are closer to where they were before the tariff announcement. With that said, bond market volatility is likely to continue as long as policy volatility does. - Potential upside catalysts. Despite the recent volatility, structural investment themes persist including AI-driven transformation (on April 30, both Meta and Microsoft reported strong earnings and outlooks), infrastructure and global diversification. AI continues to progress from the chipmakers to the end users, with meaningful productivity gains in industries from healthcare to logistics on the horizon. Infrastructure spending in the U.S. and Europe’s rearmament plans are both economic boosters, as is Europe’s move away from U.S.-centric growth toward regional self-reliance.
Portfolio Positioning
We continue to maintain globally diversified portfolios across asset classes and regions, which has been a benefit given the recent outperformance of foreign markets. At the end of April, LNW CIO Ron Albahary was in London to meet with European asset managers to whom we have allocated capital, as well as additional prospective managers. We are working to expand the universe of managers we work with outside the U.S. to further diversify portfolios and to benefit from their insights on the global capital markets.
