March 2025
US Economy: Wait-and-see attitude.
Consumer and business sentiment were both down in February on concern about inflation and lower projected economic growth, exacerbated by new U.S. trade tariffs on imports. So while U.S. personal income rose (+0.9%), consumers spent less (-0.2%). The risk of inflation sticking above the Fed’s 2% target remains elevated, with the latest CPI (Consumer Price Index) registering price increases of 3% annualized and the Fed’s favorite inflation gauge (the PCE) at 2.5%.
US Stocks: Exceptionalism waning?
The initial glow of 2025 faded somewhat in February, as the U.S. exceptionalism narrative faced headwinds. Mega-cap stocks struggled on concerns about the long-term impact of the Trump administration’s new policies and initiatives amid signs of a slowing economy. The market sectors that led in 2024 — consumer discretionary (-9.4%) and communications (-6.3%) — were the worst performers while small-cap stocks also took their lumps (-5.4%).
Foreign Stocks: Early 2025 lead.
So far this year, foreign market returns have topped the U.S. In February, Europe (+3.5%) was the lead performer as hopes for a Ukraine ceasefire supported returns before fizzling out by month-end. Meanwhile, Asia minus Japan (+1.1%) continued to ride the wave of improving economic data and the entry of China’s DeepSeek into the AI competition. Foreign returns also got a boost from a weaker dollar (-2.5% year-to-date) in light of less rosy U.S. economic data.
Fixed Income: Rebound in US bonds.
U.S. bond yields fell in February and all major fixed-income categories showed positive returns. While corporate fundamentals remain healthy, U.S. Treasuries (+2.2%) were the top-performing sector for the month as volatility and economic uncertainty led investors to perceived safe harbors. U.S. municipal bonds (+1.0%) had their best monthly return since last August even as 2025 new issuance is up around 25% vs. the same period in 2024.
Real Assets: REITs rally, gold glitters.
REITs (+4.2%) led the real assets category and nearly the entire market in February as interest-rate-sensitive equity investments benefited from lower bond yields and investors questioning the valuations of the giant AI-reliant companies. Oil continued its slump, falling to multi-month lows on growing stockpiles and weakening demand, while gold (+2.1%) continued to benefit from economic and geopolitical uncertainty.
Alternatives: Private credit rules.
Hedge funds provided incrementally positive returns in a space where fund managers tend to thrive in volatile periods, but it was private credit investments (+1.7% Jan-Feb. 2025) that outperformed, continuing to demonstrate the steady risk/return profile that makes these exposures attractive. On the flipside, digital assets such as bitcoin (-17.3%) performed poorly highlighting their risk-oriented, volatile nature.
Source of data: Bloomberg
Equities Total Return
| FEB | YTD | 1 YR | |
|---|---|---|---|
| U.S. Large Cap | (1.3%) | 1.4% | 18.4% |
| U.S. Small Cap | (5.4%) | (2.9%) | 6.7% |
| U.S. Growth | (3.7%) | (1.8%) | 19.1% |
| U.S. Value | 0.2% | 4.7% | 15.3% |
| Int’l Developed | 1.9% | 7.3% | 8.8% |
| Emerging Markets | 0.5% | 2.3% | 10.1% |
Fixed Income Total Return
| FEB | YTD | 1 YR | |
|---|---|---|---|
| Taxable | |||
| U.S. Agg. Bond | 2.2% | 2.7% | 5.8% |
| TIPS | 2.2% | 3.5% | 6.4% |
| U.S. High Yield | 0.7% | 2.0% | 10.1% |
| Int’l Developed | 0.2% | 0.1% | 1.0% |
| Emerging Markets | 0.1% | 0.9% | 7.3% |
| Tax-Exempt | |||
| Intermediate Munis | 0.8% | 1.4% | 3.0% |
| Munis Broad Mkt | 1.0% | 1.3% | 3.1% |
Non-Traditional Assets Total Return
| FEB | YTD | 1 YR | |
|---|---|---|---|
| Commodities | 0.8% | 4.8% | 11.6% |
| REITs | 4.2% | 5.2% | 13.9% |
| Infrastructure | 0.1% | 2.5% | 21.7% |
| Hedge Funds | |||
| Absolute Return | 0.2% | 1.1% | 4.8% |
| Overall HF Market | 0.3% | 1.3% | 5.3% |
| Managed Futures | (0.5%) | (1.5%) | (5.5%) |
Economic Indicators
| FEB-25 | AUG-24 | FEB-24 | |
|---|---|---|---|
| Equity Volatility | 19.6 | 15.0 | 13.4 |
| Implied Inflation | 2.4% | 2.2% | 2.3% |
| Gold Spot $/OZ | $2857.8 | $2503.4 | $2044.3 |
| Oil ($/BBL) | $73.2 | $78.8 | $83.6 |
| U.S. Dollar Index | 128.1 | 122.9 | 121.4 |
Our Take
February saw risk-off sentiment increase in U.S. markets. The unease was fueled by softening economic data, rising inflation and uncertainties surrounding potential trade tariffs, culminating in a significant drop in consumer confidence. The Federal Reserve has said it will take a cautious approach to lowering interest rates, further contributing to investor apprehension. Here are the major factors we see driving markets and volatility in the near term:
- Challenges to U.S. Growth: The potential impact of tariffs, stubborn inflation and geopolitical tensions (particularly regarding Ukraine) continue to weigh on investor confidence and the economy. As a result, equity sector performance has been mixed, with defensive stocks outperforming while tech and consumer discretionary equities have lagged. Bond yields and the dollar are down and U.S. consumer sentiment dropped to a seven-month low, primarily on inflation worries. Despite these challenges, there were some positive developments, such as the House GOP passing a budget resolution.
- Changes to U.S. Tariffs & Trade Policy: After delaying proposed tariffs on Mexico and Canada, the Trump administration levied 25% tariffs on nearly all goods from those countries on March 4 but the day after exempted autos. China will also see an additional 10% tariff levied on specific products including electronics, footwear and medicine. Slowing U.S. growth and increasing prices are certainly top concerns as the tariffs are put in place, increasing the risk of a larger trade war with our three largest trade partners.
- Rotation Away from Big Tech and AI: The release of the Chinese AI model DeepSeek continues to ripple through the U.S. tech sector and the mega-cap stars that drove returns in 2023 and 2024 have not been immune. Given high expectations and valuations for the Magnificent 7, only Meta is in positive territory through Feb. 2025 and the technology sector fell 1.4% in February. Investors appear to be rotating into undervalued and defensive sectors such as healthcare and financials. Value stocks have also seen a bump up, rising slightly for the month and 4.7% year-to-date. Meanwhile, growth stocks were dragged down by the previously mentioned tech stars and fell 3.7% in February.
- Ramifications of a Multi-Polar World: European stocks are enjoying a strong start to 2025 and gained 3.5% in February. It has been some time since Europe has outpaced the U.S. to start the year. Improved results in European manufacturing and service sectors, positive earnings revisions and rising bank profitability each played a part. After a tense meeting between U.S. and Ukrainian leaders, Europe is preparing to assume a larger role in the eventual reconstruction of Ukraine, which would result in significant infrastructure spending within the region. Higher defense spending is also a likely near-term outcome, and in the short term it does appear that energy prices in the region are trending down.
On that last point, U.S. efforts to untether itself from Europe may be a positive catalytic moment causing Europe to become more cohesive and invest in itself to ensure economic and military independence. To be clear, we are not making a market call regarding the end of U.S. “exceptionalism.” This may very well continue in other forms, as AI is adopted by a broad range of industries.
Portfolio Positioning
Since last summer, we have been saying that a rise in market volatility was to be expected toward year-end 2024 and into 2025, and this has played out so far with the equity volatility index rising significantly in the past month. So far, however, market volatility has not been extraordinary, especially following a strong decade for the U.S. stock market. After a roughly 12% annualized return over the past 10 years, at some point there will be a rotation away from large-cap U.S. stocks into other types of equities. In our experience, few investors (if any) are good at timing those calls. So continuing to rebalance to market weight (a theme you hear from us consistently) is the most prudent action.
Instead of tracking the daily headlines, we are focused on what works during times of heightened volatility: portfolio rebalancing; maintaining global diversification; incrementally adjusting portfolios’ strategic asset allocations to reduce risk; and adding when possible diversifiers such as private credit strategies and hedge funds. As this year full of change unfolds, some of our diversifying portfolio exposures are likely to hold up a bit better than others should we experience even higher equity and/or bond market volatility.
