The large tariff announcements on April 2nd led to a rapid sell-off in both the US stock and bond markets. The S&P 500 fell over 10% in two days, the biggest drop since the onset of COVID-19. The volatility index (VIX, or so called “fear gauge”) spiked to levels not seen since that period as well. While treasury bonds usually provide a safe haven in the time of crisis, they also sold off which pushed rates higher. This behavior is more like an emerging market that is experiencing a crisis caused by capital flight than the more typical rush to the safe haven of US treasuries in past market shocks. When the administration announced a 90-day pause on tariffs a week later, the S&P 500 somewhat recovered. By the end of the quarter, the S&P 500 had recovered to post positive returns for the quarter and the year.
The effective tariff rate[1], assuming no changes in imports, grew to ~30% as of April 8th, a level higher than the 20% average rate of the Smoot Hawley tariffs enacted during the Great Depression, which approached 20%. Current effective tariff rates are closer to 15%. Tariff revenues for the US Government are starting to pick up but are not materially impacting consumer prices. Inflation declined to 2.4% in May as shelter and auto insurance components continued to moderate. Crude oil prices spiked briefly when the US bombed Iran’s nuclear sites, but prices returned to $65/barrel, a level lower than the start of the year.
The Fed held short-term interest rates unchanged during the quarter at 4.25% to 4.5% and warned that uncertainty about the economy remained elevated. The Fed maintained a forecast of two 0.25% cuts in 2025 but voiced concerns about the potential impact of tariffs on inflation. The Fed has a dual mandate to promote employment and avoid inflation. As the labor market remained strong, the Fed focused primarily on price stability.
US stock markets[2] returned 11.0% for the quarter. Small cap stocks trailed slightly behind but bounced back from the shock of the tariff announcement in early April, returning 8.5%. Large growth stocks posted gains and outperformed value in the US market.
From an investment perspective, the theme for the year is the “return of diversification,” particularly international diversification. International developed and emerging markets returned 11.8% and 12.0%, respectively. International stocks benefited from the dollar weakening by ~10% year to date, but still outperformed US stocks after adjusting for currency. Small and value stocks outperformed growth and large stocks in international markets as well.
Domestic real estate[3] was the only asset class to post a loss for the quarter with a return of -1.7%. US Utilities[4] gained 4.1% for the quarter. Reinsurance posted a gain for the quarter of 5.6%.[5]
Certain information contained herein has been obtained from third-party sources and such information has not been independently verified by PWCO. No representation, warranty, or undertaking, expressed or implied, is given to the accuracy or completeness of such information by PWCO or any other person. While such sources are believed to be reliable, PWCO does not assume any responsibility for the accuracy or completeness of such information. PWCO does not undertake any obligation to update the information contained herein as of any future date.
Except where otherwise indicated, the information contained in this presentation is based on matters as they exist as of the date of preparation of such material and not as of the date of distribution or any future date. Recipients should not rely on this material in making any future investment decision.
[1] Source: JP Morgan. Average tariff rate is the total duties collected divided by the value of total goods imports for consumption. Effective rates are estimated based on announced rates assuming no change in import levels.
[2] Large, small, and broad market returns are based on the Russell 1000, 2000, and 3000. Value and Growth are based on the respective Russell indexes. International developed and emerging market equities are based on EAFE and MSCI Emerging Markets indices, respectively.
[3] Dow Jones US Select REIT Index.
[4] Utilities are represented by the MSCI US IMI/Utilities Total Return Index.
[5] Reinsurance represented by SwissRe Catastrophe Bond Index.
