April 2025: In Like a Lion, Out Like a Lamb

The month at a glance

"In Like a Lion, Out Like a Lamb." The proverb usually applies to the weather in March, but April certainly provided swings in markets and trade and economic policy rhetoric. The equity market sell off that began in February in anticipation of the impact of planned tariffs on inflation and growth, extended to start the month when President Trump announced actual tariff plans on April 2nd. The proposals were larger and more widespread than expected and the stock market reaction was fast and negative. Escalating trade war threats came quickly, but were soon followed by an announcement on April 9th that the imposition of tariffs for all countries except China would be paused for 90 days to allow for bi-lateral negotiations to take place. In addition, as the month progressed, tariff exceptions were put in place for a variety of goods, like certain electronics from China and components of auto manufacturing, and the administration hinted that negotiations were progressing. These changes and a general softening of the trade war rhetoric, eased investor fears of the worst case scenarios and equity markets staged a strong rebound to end the month.

Adding to that challenge were comments from President Trump and some in the administration suggesting that the President was considering firing Fed Chair Powell before Powell’s term ends in May of 2026.¹ Global markets reacted negatively to that posture with the dollar falling sharply and gold rising to record levels as investors raised questions about the US as a “safe haven”. Like the tariff policy, the threats to Powell remaining at the helm of the Fed were walked back and markets calmed. Still, the uncertainty around trade and economic policy persists and corporate spending patterns and forward earnings guidance as well as consumer and business sentiment reflects the challenges to assessing the economic and market outlook in the near-term. 

Meanwhile, current economic conditions remained relatively solid. Employment continued to grow albeit at a slowing pace. Inflation eased somewhat in the latest month, but remains above the Fed’s target. Initial estimates of a decline in Q1 GDP caught investors attention, but were largely explained by shifts in import patterns related to the tariffs. Early Q1 corporate earnings announcements were mixed, with some softening of the outlook from retailers and consumer sector companies while many companies tied to AI trends reported continued strong demand. In those announcements, tariffs have dominated the discussion with many management teams pausing guidance until policy clarifies. This combination of growth and inflation trends and policy uncertainty has markets expecting the Fed to keep rates on hold at the May 6-7 meeting.

• Tariffs announced on April 2nd were larger and broader than expected, but were put on pause for most countries on April 9th.
• Equity markets fell sharply early in the month but recovered substantially off their lows by the end of April.
• International equities continued to outperform US stocks.
• Long term interest rates swung wildly mid-month as investors processed unwinding of the “basis” trades, foreign demand for US treasuries and reduced growth expectations.
• GDP growth was negative in Q1 as imports surged on companies “front-running” tariffs.²
• Employment growth has slowed, but remains above recessionary levels.³
• Consumer spending remained solid with a boost from “pre-tariff” auto sales, but sentiment continued to decline.⁴
• Inflation fell in March from February levels with the Fed’s preferred PCE price index up 2.3% (full index) and 2.6% (excluding food and energy) from a year earlier.⁵

Stocks rally to end month as tariffs pause and rhetoric softens

Equity markets ended the month with mixed results, but rallied substantially off their early April lows. The recovery in stock prices in the US was led by last year’s large cap growth and technology stock leaders. Much of that reversal was from generally solid earnings reports from stocks most connected to the AI theme. International stocks, both developed and emerging markets, posted positive returns for the month and are the only broad equity segment to show gains for the year. US small cap and value-oriented stocks continued to face headwinds from increasing fears of a coming slowdown in economic activity.  The undervaluation of these lagging segments relative to history continues to hit record levels.

• The S&P 500 fell 11% to start the month, but staged a record seven day winning streak to finish April down just 0.68%.
• International developed market equities continued to lead, up 4.69% for the month and over 12% for the year.
• US Small Cap remains the laggard, off 4.19% in April and over 12% for the year.
• Growth stocks regained their footing in April as tech and AI related names recovered from their recent lows.
• April saw a reversal in sector leadership compared to Q1.
  
  • Technology topped the S&P sector returns but remains down over 11% for the year.
  • Defensive sectors (healthcare, utilities) slipped in the rankings for the month.
  • Energy stocks fell over 13% in April on plummeting oil prices.

Credit markets go on a wild ride

Longer term interest rates ended the month down slightly over the month, but the path was anything but smooth. Like in the equity markets, the volatility came from the shifting details on tariffs and the impact on inflation and economic growth. That uncertainty was especially evident in longer-term US treasuries. After falling steadily in early April, the 10-year US Treasury yield jumped almost 50bp during the second week of the month, one of the biggest spikes ever. The reasons for the rise were multi faceted: an unwinding of the “basis trade” (arbitraging yield differences between bond futures and cash bonds) where hedge funds and other traders had to sell their cash bonds to cover losses or meet funding obligations; an increase in expectations that short-term inflation from tariffs would cause the Fed to keep rates higher for longer; and fears that the foreign appetite for US treasuries would soften. As the month went on, the basis trade issues seemed to ease and foreign demand in subsequent treasury auctions remained solid and yields declined steadily.

• Global bonds fared best as a fall in euro government bond yields combined with a weakening US dollar boosted dollar denominated returns.
• US treasuries, both long and short term, eked out gains for the month amidst increased volatility.
• Returns were weaker for riskier segments of the bond market like EM and High Yield bonds and preferred stocks.
• Municipal bonds returns were weak on substantial amounts of new issuance and tax-related selling.¹⁰

An update on the ‘dual mandate’

Once again, we check back in on the Fed’s dual mandate to maintain price stability and to ensure full employment. The March inflation releases showed some easing in inflation from the prior months. Headline CPI was up 2.4% and core CPI excluding food and energy was up 2.8% from a year earlier. The core rate was the lowest level since March 2021. Much of the decline in the headline index came from a sharp fall in gasoline prices. The Personal Consumption Expenditures index (PCE) also showed a decline in March from February and is now up 2.3% from a year earlier for the headline index and up 2.6% for the PCE excluding food and energy.

While the decreases are a good sign that inflationary pressures are not currently rising, inflation still remains ahead of the Fed’s 2% target. In addition, March inflation came in a bit higher than economists expected given declines in oil and gas prices. Finally, the impact on prices from tariffs have not yet shown up in these measures and remain hard to forecast. Despite the “highly uncertain” impacts in the short-term, the Fed remains focussed on keeping long-term inflation expectation “well-anchored”.¹¹ In his most recent speech, Chair Powell pointed to survey- and market-based measures that show near-term inflation expectations up significantly, with survey participants citing tariffs as the cause.¹² Those same surveys show that “longer-term inflation expectations, for the most part, appear to remain well anchored; market-based breakevens continue to run close to 2 percent.”¹³ These are the mixed expectations the Fed is facing as it tries to strike the balance between inflation and growth and is why interest rate cuts will likely have to wait for more clarity on the tariff policies and their potential impact on inflation.

On the other dual mandate front, employment growth in April fell from March levels, but remained relatively strong. The non farm payroll report showed 177,000 jobs added for the month, well ahead of expectations, while the unemployment rate held steady at 4.2%.¹⁵ Those results allayed concerns that followed unexpectedly low monthly job gains (+62,000) from the ADP private employers survey, less than half of the gains reported in March.¹⁶ Other data points on the employment situation were also mixed. Initial claims for unemployment and measures of layoffs remain relatively stable, but the latest continuing unemployment claims jumped in the week ending April 19th to the highest level since November 2021.^{17 18 19}

Employment is generally said to be a lagging indicator of economic activity, making it hard to use to spot turning points. This is even more true in the current environment. The ADP chief economist said, “Employers are trying to reconcile policy and consumer uncertainty with a run of mostly positive economic data. It can be difficult to make hiring decisions in such an environment.”²⁰ Surveys of consumer and business expectations can provide some insights. The Conference Board survey indicated that 32.1% of consumers anticipated fewer jobs in the next six months, up from 28.8% in March.²¹ The March ISM survey of businesses showed that employment activity in the services sector contracted in March for the first time since September 2024 but expanded for manufacturers in the latest month.²²

On balance, the employment picture appears to remain at least solid enough for the Fed to remain modestly more focussed on the inflation side of their dual mandate and less likely to cut rates at their next meeting on May 6-7.

Slowing growth and declining sentiment

The initial look at first quarter GDP caught investors and economists somewhat by surprise. Forecasts anticipated that there would be a slowing in growth, but not an outright decline. The -0.3% decline was easily explained by the massive increase in imports (which are a subtraction from the GDP accounting equation).²⁵ The change in imports subtracted just over 5% from GDP growth for the quarter, more than offsetting the impact from other components. The jump in imports reflected businesses increasing their imports ahead of anticipated tariffs. This “front running” of tariffs is also seen in the large increase in inventory over the quarter (+2.25%), indicating that the items imported were not matched completely by current consumption. With many tariffs on pause until July, it remains to be seen whether this front running continues into the second quarter. In addition, businesses may be leery of increasing imports and inventory further if they are expecting slower growth. Consumption, which makes up 2/3rd of the level of GDP, increased modestly in Q1, but that too was partly boosted by a surge in auto purchases in anticipation of rising prices from tariffs.

Looking back at the composition of GDP growth over the past 3 years shows just how unusually large and impactful the increase in imports was in Q1.²⁷ The jump in inventory was also notable compared to recent history. This inventory jump in Q1 is explainable by the tariff front running, but bears watching because inventory overhang (where goods pile up as sales slow) can often be an indicator of recessions. Finally, this 3 year look back at GDP components shows that the Q1 consumption change was about half of what it was in the past two quarters. While Q1 GDP was heavily impacted by anticipated tariffs, it could still be seen as indicating some signs of a slowing economy.

Similar to the employment outlook, consumer confidence in the future economic outlook overall has declined sharply in recent months. The widely cited University of Michigan Consumer Sentiment Survey registered a third consecutive decline in its broadest measure in March and is now down 30% from December 2024.²⁹ The decline was seen across demographic and political affiliation groups. Sentiment among the top third of income earners dropped 26% in March alone, a worrisome sign for the trajectory of the economy as this income group generates the lion’s share of aggregate consumption.³⁰ Still, sentiment can be volatile and could shift substantially if the tariff policies influencing so many measures of economic activity and sentiment are softened.

Combining the modest signs of slowing in expected economic activity and the weakening sentiment of consumers with the uncertainty of at least the specifics of tariffs, makes it more challenging than usual to predict near-term economic and market conditions. This is why so many corporations have paused earnings guidance during their latest announcement calls. Amidst this uncertainty, many different outcomes can play out in the short-term. Just in the past several weeks we have seen a surge in gold prices to record levels when fears were rising and then, a few days later, an equally impressive rally in equity prices when investors saw even a small amount of deescalation of tariff plans and rhetoric. Periods  of heightened volatility like now are often times that present great opportunities, but those are only obvious with hindsight.

Despite the temptation to time movements in and out of markets and asset classes, it is best to recognize the need to embrace a long-term perspective. The current period of uncertainty makes it particularly challenging to accurately predict short-term outcomes, but it also presents opportunities for those who can remain patient and focus on fundamental long-term growth potential rather than trying to guess the direction of market movements in the short-term.

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Compound Planning, Inc. is an investment adviser registered with the Securities and Exchange Commission and based out of New York. The views expressed in this material are the views of Compound Planning through the period ended March 31, 2025 and are subject to change based on market and other conditions.

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[1] https://apnews.com/article/trump-powell-federal-reserve-fed-termination-b6148c8048dda538a6ca3b5a270df09e
[2] https://www.bea.gov/news/2025/gross-domestic-product-1st-quarter-2025-advance-estimate
[3] https://www.bls.gov/news.release/empsit.nr0.htm
[4] https://www.bea.gov/news/2025/personal-income-and-outlays-march-2025
[5] https://www.bea.gov/news/2025/personal-income-and-outlays-march-2025
[6] https://www.spglobal.com/spdji/en/index-family/equity/
[7] https://www.msci.com/end-of-day-data-search
[8] https://www.nasdaq.com/market-activity/index/comp/historical
[9] https://www.spglobal.com/spdji/en/index-family/equity/
[10] https://www.breckinridge.com/insights/?type=commentary
[11] https://www.federalreserve.gov/newsevents/speech/powell20250416a.htm
[12] https://www.federalreserve.gov/newsevents/speech/powell20250416a.htm
[13] https://www.federalreserve.gov/newsevents/speech/powell20250416a.htm
[14] https://www.bea.gov/data/personal-consumption-expenditures-price-index
[15] https://www.bls.gov/news.release/empsit.nr0.htm
[16] https://adpemploymentreport.com/
[17] https://www.dol.gov/newsroom/releases
[18] https://fred.stlouisfed.org/series/JTSJDL
[19] https://fred.stlouisfed.org/series/CCSA
[20] https://adpemploymentreport.com/
[21] https://www.conference-board.org/topics/consumer-confidence
[22] https://www.ismworld.org/supply-management-news-and-reports/reports/ism-report-on-business/
[23] https://adpemploymentreport.com/
[24] https://www.bls.gov/news.release/empsit.nr0.htm
[25] https://www.bea.gov/news/2025/gross-domestic-product-1st-quarter-2025-advance-estimate
[26] https://www.bea.gov/news/2025/gross-domestic-product-1st-quarter-2025-advance-estimate
[27] https://www.bea.gov/news/2025/gross-domestic-product-1st-quarter-2025-advance-estimate
[28] https://www.bea.gov/news/2025/gross-domestic-product-1st-quarter-2025-advance-estimate
[29] http://www.sca.isr.umich.edu/
[30] http://www.sca.isr.umich.edu/
[31] https://www.sca.isr.umich.edu/