April 2025 Market Commentary

U.S. Equity markets suffered steep declines in March as tariff concerns reignited inflation and recession fears. Trade policy clarity emerged, but announced tariffs were higher than expected. The stock market and the economy are not in sync, but that may change. The Fed stays on the sidelines for now. Investment discipline is most important during times of heightened uncertainty.

U.S. equity markets experienced significant losses in March, with the S&P 500 and the NASDAQ Composite indices posting their worst monthly percentage drops since December 2022, driven by the Trump administration's tariff policies and economic concerns. Emerging markets were a bright spot, delivering positive returns, while the bond market stayed flat despite mounting economic uncertainty. Energy and Utilities were the best performing sectors in March, while Consumer Discretionary, Technology, and Communication Services were among the weakest sectors.

"For some reason, because of the way investor psychology works, people switch from only seeing the good to seeing only the bad."

-Howard Marks

High Anxiety

Two pivotal market sentiment indicators are sounding the alarm, signaling that investors are teetering on the edge of panic. The CNN Fear & Greed Index is currently flashing 4, casting a shadow of despair over the market and highlighting the intense anxiety gripping investors. The index is calculated based on seven equal-weighted indicators that measure some aspect of stock market behavior. They are market momentum, stock price strength, stock price breadth, put and call options, junk bond demand, market volatility, and safe haven demand. The index ranges from 0 to 100, where 0 represents maximum fear and 100 signals maximum greediness. The lowest level ever recorded on the index was 2 on March 12, 2020, when the S&P 500 Index declined by 10% in one day during the initial surge of the COVID-19 pandemic.

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The VIX, or CBOE Volatility Index, is a real-time market index that represents the market's expectations for volatility over the next 30 days. It is often referred to as the "fear index" because it tends to rise when investors anticipate significant market fluctuations, indicating higher levels of fear or uncertainty. Investors and traders use the VIX to gauge market risk and sentiment, and it can also be traded through various financial instruments like futures, options, and exchanged-traded funds. The VIX recently reached its highest daily close since April 21, 2020, and is now sitting at the top one percentile since the creation of the index in 1990. With a 109% increase last week, the VIX experienced the third biggest weekly spike ever.

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This heightened investor anxiety is reminiscent of the early days of the pandemic when fear and volatility dominated the financial landscape. However, unlike then when the primary concern was the unpredictable impact of COVID-19, today's anxiety stems from the uncertain effects of the new administration's trade policies. As noted in last month's commentary, trade tensions began to simmer on Inauguration Day, January 20, when the White House swiftly launched the America First Trade Policy Memorandum, outlining key priorities to achieve a range of economic and non-trade-related goals. What followed over the next 45 days was breathtaking. A series of executive orders, tariffs, retaliatory tariffs, reciprocal tariffs, paused tariffs, exemptions, and amendments were issued in quick recession.

Tariff Tantrum

Trade tensions came to head on Liberation Day, April 2, when President Trump announced tariffs on nearly all foreign nations, including the Heard and McDonald Islands, which are populated only by penguins and seals. The inclusion of the islands sparked considerable debate, but it's clear that the tariff announcements had an extreme impact. At a press conference, the president held up a chart showing the United States would charge a 34% tax on imports from China, a 20% tax on imports from the European Union, 25% on South Korea, 24% on Japan and 32% on Taiwan. The new tariffs were in addition to recent announcements of 25% taxes on auto imports, levies against China, Canada and Mexico, and expanded trade penalties on steel and aluminum. Trump said "April 2, 2025, will forever be remembered as the day American Industry was reborn, the day America's destiny was reclaimed and the day that we began to make America wealthy again."

Leading up to Liberation Day, President Trump emphasized the need for tariffs to protect American jobs and resources from foreign exploitation. He repeatedly stated that other countries had been taking advantage of the U.S. for years, describing the tariffs as a necessary measure to reclaim economic sovereignty. Although Trump claimed that the tariffs would be "light", the table presents a different picture. Additionally, a Cato Institute report based on World Trade Organization data indicated the trade-weighted average tariff rates imposed by most countries are much lower than the Trump administration claimed.

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The Market Reacts

Not surprisingly, the newly announced tariffs, the steepest in nearly a century, sparked a substantial selloff in global markets. U.S. equity markets were hit hard, plunging between 5% and 7%. The selloff extended into a second day, resulting in similar levels of losses. Significant declines in international stocks, bond yields and oil prices and a weakening of the U.S. dollar were also seen over the two-day period. The two-day selloff suggests that the tariff's economic effects, if they hold, will likely be severe. It's understandable to assume that the stock market's path would closely mirror the economy but in reality, the relationship is more complex.

The Stock Market and the Economy

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While the stock market and the economy tend to loosely move in the same direction, they often act in widely different ways, particularly over shorter time periods. The stock market is generally considered forward-looking, meaning that stock prices reflect what investors expect to happen in the future, rather than solely based on past performance. By contrast, some economic data looks back at what has already happened. Some economic indicators, like labor statistics, tend to lag the broader economy because businesses often react to how the economy is faring. While the labor market was strong in March, the stock market, conversely, was weak.

Total nonfarm payroll employment increased by 228,000 in March, while the unemployment rate remained at 4.2% with 7.1 million unemployed. Job gains were seen in several industries, including Healthcare (54,000 jobs added), social assistance (24,000), retail trade (24,000), and transportation and warehousing (23,000). While the labor market demonstrated considerable strength, the manufacturing sector experienced a notable slowdown in March.

A Manufacturing Slowdown

The U.S. manufacturing sector contracted in March, with the Manufacturing PMI Index falling to 49% after two months of marginal expansion. Demand weakened, as reflected by the New Orders Index (45.2%), which declined for the second consecutive month. Additionally, the Backlog Orders Index shrunk further (44.5%), maintaining a 30-month contraction trend. Production also fell in a contraction direction (48.3%), while employment declined (44.7%), indicating continue job reductions in the manufacturing sector.  Overall, the March report highlights a challenging environment for the manufacturing sector, with several key indicators showing contraction. The rise in prices and the drop in new orders and employment are particularly concerning. Last week's tariff announcements will likely add to the uneasiness.

Fed Speak

Last Friday in prepared remarks ahead of a conference presentation, Fed Chairman Powell reiterated that the Fed is squarely focused on achieving the dual-mandate goals Congress has given of maximum employment and stable prices. Powell acknowledged that while uncertainty is high and downside risks have risen, the economy is still in a good place. The limited first quarter hard data are consistent with a slower but still solid growth outlook. At the same time, soft data, like surveys of households and businesses, report dimming expectations and higher uncertainty about the outlook. Survey respondents point to the effects of new federal policies, especially related to trade.

It was refreshing to see Powell address the elephant in the room. He said higher tariffs will be working their way through our economy and are likely to raise inflation in coming quarters. 

While uncertainty remains elevated, it is now becoming clear that the tariff increases will be significantly larger than expected. The same is likely to be true of the economic effects, which will include higher inflation and slower growth. The size and duration of these effects remain uncertain. While tariffs are highly likely to generate at least a temporary rise in inflation, it is also possible that the effects could be more persistent. Avoiding that outcome would depend on keeping longer-term inflation expectations well anchored, on the size of the effects, and on how long it takes for them to pass through fully to prices. Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem.

Connecting the Dots

Many Wall Street strategists and economists are scrambling to reset economic, inflation, and market return expectations. Peter Berezin, the Chief Global Strategist and Director of Research at BCA Research, is not changing his year-end price target for the S&P 500 Index. Last December, Berezin was on an island with his price prediction of 4,450, calling for a 25% decline while the average analyst expected a 10% increase in 2025. In an interview last week, Berezin confirmed his outlook and said a U.S. recession is likely, potentially as soon as the second quarter.  He sees a very ugly feedback loop, where people slow their spending because they're worried about their job prospects, and that ends up being self-fulfilling. Less spending means less hiring, and if there is less hiring there's less employment. If there is less employment, then there's less income and even less spending.

Quantifying the impact of higher tariffs is difficult but some strategists see economy-wide prices increasing 1-1.5 percentage points (off the current 2.8% inflation base). Furthermore, prices could be higher if companies try to maintain margins. Economic growth may deteriorate at a similar pace which would likely lead to higher unemployment rates. When both inflation and unemployment rise simultaneously, it creates a challenging economic situation known as stagflation, a tough dilemma the Federal Reserve would rather not face.

Looking Ahead

We wrote last month that the probability of a full-scale trade war is uncertain and that we expect policy clarity to emerge in the coming weeks and months. With the announced tariffs some clarity has materialized but uncertainty remains, adding to market instability. For relief, investors may look to the Federal Reserve for a response. The Fed, at the urging of President Trump, may cut interest rates. However, based on recent public comments, Chairman Powell thinks it is too soon to judge the appropriate path for monetary policy. Nevertheless, the futures market is now calling for four quarter-point rate cuts in 2025, an increase over previous expectations.

An alternative solution to market instability may be tariff concessions. Based on recent statements and actions, it appears unlikely that President Trump will back down from his tariff policies. He has consistently defended the tariffs, emphasizing their importance for reducing the trade deficit and bringing jobs back to the U.S. Despite criticism and market volatility, Trump has urged Americans to "hang tough" and has shown no intention of reversing tariffs.

However, President Trump and his administration have suggested the president is willing to negotiate with other countries to lower his sweeping tariffs on imported goods, as dozens of countries reach out in hopes to make trade deals. With more than half of U.S. imports originating from five countries (Mexico, China, Canada, Germany, and Japan), investors will be closely focused on trade agreements with these nations.

Maintaining investment discipline when policy uncertainty is high can be challenging. As the tariff tantrum sell-off worsens, some investors may be tempted to "buy the dip." Some of the best performing stocks of the last two years are priced 30% or more lower than recent highs, including Nvidia, Meta, Broadcom, Deckers, and most of the homebuilder stocks, to name a few. Perhaps today's prices represent great entry points, but investors must be willing to accept further price declines if the economy sinks from here. On the other hand, going to cash would be a mistake if meaningful trade deals led to a material market bounce.

We contend that focusing on long-term fundamentals and eliminating emotions from investment decisions are essential steps for reaching long-term financial goals. We continue to assess market opportunities and portfolio positioning and will make changes when appropriate.

In other news, many of you have likely heard the news announced April 3rd that Old Point Wealth Management's parent company, Old Point Financial Corporation, agreed to merge with TowneBank, with that deal expected to close later this year.  We are excited not only to partner with TowneBank and join their talented team of bankers, but also at the enhanced services and solutions this will bring to our clients. 

In the meantime, we remain the same dedicated partner with the same team of experts, all of whom are committed to providing you with the finest client experience possible. We appreciate your confidence and support and encourage you to reach out to an Old Point team member with any questions.