Trust Investment Management
U.S. equities faced a challenging first quarter as investors became increasingly concerned about the negative impact tariffs, inflation, and cuts to government spending could have on the overall economy. The S&P 500 experienced a sell-off in January but managed to recover and close out the month higher. However, January’s positive returns were not enough to offset the back-to-back losses experienced in February and March. The S&P 500 closed out the quarter 5.63 percent lower while U.S. small caps declined by nearly 10 percent. Developed international and emerging markets steadily advanced throughout most of the first quarter, posting gains of 6.86 percent and 2.93 percent respectively (highlighting the benefits of diversification). Fixed income rallied as yields fell and finished the quarter with positive returns.
Personal Consumption Expenditures (PCE), excluding volatile food and energy, increased 2.8 percent from one year ago. The PCE is the Fed’s preferred inflation gauge. As expected, the Fed decided to maintain the target range for the federal funds rate at 4.25 to 4.50 percent. In a press release the Fed indicated recent indicators suggest that economic activity has continued to expand at a solid pace. The unemployment rate has stabilized at a low level in recent months, and labor market conditions remain solid. Inflation remains somewhat elevated. While it seems that the Fed has penciled in two rate cuts, the CME Group’s FedWatch tool currently shows a 72% probability that rates will be at least 1% lower by the end of the year.
The U.S. economy has been showing signs of slowing but continues to be resilient. The unemployment rate changed slightly to 4.1 percent and has remained in a narrow range of 4.0 percent to 4.2 percent since May 2024, according to the U.S. Bureau of Labor Statistics. The Atlanta Fed’s GDPNow model projects real GDP to contract by 3.7 percent in the first quarter of 2025. However, the Organization for Economic Cooperation and Development (OECD) forecasts U.S. GDP growth of 2.2 percent for the year.
The markets can be quite volatile during periods of uncertainty but that is the proverbial price of admission and what many would consider to be a normal part of investing. As a very successful investor once told me (you would likely know him), “The stock market is like someone playing with a yo-yo while riding the up escalator. The secret is to focus on the escalator and not the yo-yo.”
