The U.S. economy faced mixed signals in the first quarter of 2025, with some areas showing strength while others indicated potential challenges ahead. Initial estimates indicate that Real Gross Domestic Product (GDP) grew at an annualized rate of less than 1.0% during the first quarter. This marks a slowdown from the robust growth rate observed in 2024 (2.8%), reflecting a more cautious economic environment. The economy's ability to sustain growth amidst these challenges has been noteworthy, but unfortunately, its luck may be running out.
Consumer conditions remained relatively stable, contributing to the economic momentum. Nonfarm payrolls added another 228,000 jobs in March, better than expectations. Along with that, the unemployment rate rose slightly to 4.2%, but there are signs of potential future job market weakness to come. Average hourly earnings continued to grow, supporting consumer spending despite rising concerns. Notably, in the first quarter, consumer confidence experienced a significant decline given expectations for future inflation as well as recession worries.
The Federal Reserve's monetary policy played a steadying role in shaping the economic landscape. In the first quarter of 2025, the Fed maintained a restrained approach, balancing the need to control inflation with the goal of sustaining economic growth. The market's expectations for rate cuts have been tempered by persistent inflation concerns. The Fed's decision to hold the overnight Fed Funds rate steady reflects its commitment to managing inflation while avoiding a recession. This approach has been met with mixed reactions from the market, with some investors expressing concerns about the risk of rates remaining too high.
Political uncertainty remained a significant factor influencing economic sentiment. While there have been lots of favorable policies implemented, the new administration's trade policies have created uncertainty for businesses. These tariffs have already impacted business operations, leading to concerns about their long-term economic effects. Discussions about significant reductions in federal employment and spending have also raised concerns about their potential impact on the economy. Lurking in the background, the national debt, which now exceeds $100,000 per U.S. citizen, poses a long-term risk to the economy if not addressed. The lack of political will, from either party, to tackle this issue adds to the uncertainty facing investors and consumers.
Looking beyond the United States, the global economy demonstrated resilience and growth in the first quarter of 2025 despite facing several challenges. Developed economies, including the European Union and Japan, continued to show robust growth, driven by strong consumer spending, stable employment rates, and accommodative monetary policies. However, growth is expected to be slower compared to the U.S. due to geopolitical tensions and trade uncertainties. Emerging markets also experienced respectable growth, benefiting from a relatively stable currency and interest rate environment. However, inflation remained a concern in many regions, prompting central banks to carefully balance interest rate adjustments to manage price stability without stifling economic growth.
Geopolitical tensions, particularly in Ukraine and the Middle East, continued to pose risks to global economic stability. These conflicts affected energy prices and supply chains, leading to volatility in commodity markets. Additionally, technological advancements and digital transformation initiatives across various industries contributed to productivity gains and economic expansion. Overall, the global economy in the first quarter of 2025 was characterized by favorable sentiment with a focus on potential storms on the horizon.
Looking ahead, the U.S. economy is entering stormy waters given the escalation of the global trade war. Initial projections suggest a substantive risk of entering a recession in 2025. The impact of proposed tariffs and immigration policies could weigh so significantly on growth that outright declines in GDP might be seen starting in this second quarter. If that were to happen, the unemployment rate is anticipated to move quickly higher. Additionally, if these tariff conditions persist, inflationary pressures are likely to grow, with the Consumer Price Index (CPI) expected to show a significant increase. This would put the Federal Reserve in the difficult position of wanting to cut rates to stimulate the economy, but in doing so risk adding fuel to the inflationary fire.
Globally, the economic outlook for the second quarter of 2025 is also challenging for the same reasons. Developed economies, such as those in the European Union and Japan, are projected to experience slower growth compared to the U.S., largely due to the escalating trade tensions. Emerging markets, likewise, are expected to be hindered by the increased tariffs.
Given the challenging economic conditions, what should an investor do? Certainly, recognize the stormy waters in which they journey, but don’t abandon the journey altogether. The key is to remain vigilant and focused. Prioritizing long-term goals is essential, regardless of any short-term volatility that exists. Investors should consider diversifying their portfolios to mitigate risks and capitalize on growth opportunities across investment classes, sectors, and regions.
Sources:
Bureau of Economic Analysis
Bureau of Labor Statistics
International Monetary Fund
The Conference Board
The first quarter started with a bit of new year profit taking but found support in the middle of January to rally and then move sideways until the US markets hit resistance in mid-February and proceeded to fall for the rest of the quarter while the International and Emerging markets went the other direction. This diversion between the US markets and the rest of the world narrowed slightly at the end of the quarter as the fear of tariffs being planned by the Trump administration started accelerating the correction process of the last six weeks of the quarter. With all this volatility in the first quarter of the year, the international markets outperformed the US markets for the first time in many years. Investors’ optimism about the economic recovery continued to weaken due to fear of slower-than-expected interest rate decreases, slower GDP growth that may be negative for the quarter, and the effect of Trump’s tariffs on the US and global economies. The S&P 600 Small Cap index, the S&P 400 Mid Cap Index, and the S&P 500 Index all ended the quarter with weak returns of -8.94%, -6.11%, and -4.28% respectively, while the S&P International 700 index posted an extremely strong return of 6.21%.
Over the past 12 months, the stock market witnessed a generally positive trajectory across all the major equity indexes until mid-February when the US markets started to fall toward correction territory. The S&P 500 still experienced modest growth during this period, turning in a one-year number of 8.23% on a total return basis. In contrast, the S&P 400 and S&P 600, representing mid-cap and small-cap companies, enjoyed overall gains until February 19th when the retreat started into the end of the quarter. The S&P 400 Mid-Cap index posted a one-year return of -2.73%, outpacing the S&P 600 Small Cap index that fell 3.43% during the same time frame. These indexes suffered from increasingly negative sentiment as analysts started to stir up fear of Trump’s trade policies, a slowing economy, and a lower probability of additional rate cuts by the Federal Reserve this year. Some pundits are even starting to pound the table that the recession that never came in the last three years is definitely coming in 2025. As for the S&P International 700 index, it was much more volatile in the past year as it struggled to keep pace with the booming US Large Cap market until early January when the International and Emerging markets stepped up and outperformed all US markets for the final three months of the last 12 with a one-year return of 6.93%. Overall, the past 12 months exhibited positive market sentiment even in the face of continued headwinds of inflation numbers not falling as fast as the markets previously had hoped. Even though we are in the first innings of the new bull market and it appears we are amid the correction we have been warning about for several quarters, we recommend investors remain invested and stay focused on the long-term opportunities in a well-diversified global portfolio as the probability of positive returns over the next 12 to 24 months once this correction is over is extremely high.
Inflation came in at 0.50% (Month over Month) in January, exceeding expectations of a 0.30% increase. The estimate for the month-over-month number in February was for an increase of 0.30% and came in lower than expectations at only 0.20%. The expectation for March was for a month-over-month increase of 0.10% but actually came in below target by falling 0.10% when it was released on April 10th. Hopefully, we will continue to see month-over-month numbers either fall or stay in the 0.0% to 0.20% territory for the next several months so that the CPI year-over-year number can come back towards the 2 to 2.5% level over the next 12 months.
GDP growth came in lower than the initial expectation of 2.5% for the fourth quarter, with an actual 2.3% growth rate for the quarter in the Advance Release. The expectation was revised to 2.3% for the Second Release and came in to meet that expectation. The Third Revision maintained the expectation of 2.3% and the actual print came in stronger than expected when it was released at 2.4%. The debate among economists and market pundits during the past quarter has been focused on whether the Fed will have to restart its plan to lower interest rates to avoid a recession due to a weakening economy given the implementation of Trump’s DOGE cost-cutting process and the threat of new tariffs on our global trading partners.
The yield curve is no longer inverted but there is now a fear of a recession brought on by the economic policies of the Trump administration and their effect on the US consumer. Recessions are usually declared after an inversion corrects so this would not be surprising.
The Unemployment rate dropped to 4.0% in January before rising back to 4.1% in February. In March we saw the unemployment rate tick up to 4.2%, due to the increase in layoffs in the government workforce. Although we are above the 4% level, it is possible we could see the Unemployment Rate continue its upward path in 2025 if the economy slows and layoffs increase as a consequence of the Trump Tariff policies.
Nonfarm Payrolls had a disappointing showing with January coming in below expectation at 143k new jobs, which was below the estimate of 176k. The new job numbers rebounded in February and March with both months beating the previous month with 151k in February and 228k in March. If job growth continues to remain strong as we start to move through the year, the recession that several are predicting may be averted.
The Federal Open Market Committee maintained their “pause” on cutting the Federal Funds rates during the first two meetings of 2025. Based on Chair Powell’s recent comments, we should not be surprised if the “pause” in rate cuts coming from the FOMC remains in place for the next several months and will be dependent on the data which is showing a slowing but resilient economy. Although many analysts fully expect the rate cut cycle to continue in 2025, a few economists are saying there will be no interest rate cuts in 2025 if inflation starts to rise. The current expectation is for the terminal rate to be in the 3.5% range by late 2026 or early 2027 due to ongoing inflationary concerns.
Past performance is no guarantee of future results. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. For performance data current to the most recent month end, please call 877.658.9473.
Past performance is no guarantee of future results. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. For performance data current to the most recent month end, please call 877.658.9473.
Past performance is no guarantee of future results. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. For performance data current to the most recent month end, please call 877.658.9473.
Past performance is no guarantee of future results. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. For performance data current to the most recent month end, please call 877.658.9473.
Past performance is no guarantee of future results. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. For performance data current to the most recent month end, please call 877.658.9473.
Past performance is no guarantee of future results. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. For performance data current to the most recent month end, please call 877.658.9473.
Past performance is no guarantee of future results. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. For performance data current to the most recent month end, please call 877.658.9473.
Past performance is no guarantee of future results. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. For performance data current to the most recent month end, please call 877.658.9473.
Yields fell, reversing the recent trend, falling across the rate spectrum, giving the fixed income markets positive returns for the quarter. Interest rates from the 2-year to 30-year maturities all moved lower in the first quarter, as it is now expected that the Federal Reserve will maintain their pause in their process of lowering interest rates for the first half of 2025, if not the entire year.
As of the end of the fourth quarter, the 3-month T-Bill yield fell from 4.32% to 4.30% vs the 10-year US Treasury which tumbled by over 36 bps from 4.572% to 4.207%.
The 2-year U.S. Treasury yield declined from 4.243% to 3.885% for a decrease of over 35 bps as the 5-year yield fell from 4.383% to 3.95% (a decrease of over 43 bps) and the 30-year treasury saw a decline from 4.783% to finish the quarter at 4.572% (a decrease of 21 bps).
The probability of a recession has moderated as the economy has not slowed as much as expected and the employment numbers and consumer spending remain strong. Although a recession is probably avoidable, the estimate remains around 30% according to the Bloomberg survey results.
Past performance is no guarantee of future results. The performance data quoted here represents past performance. Current performance may be lower or higher than the performance data quoted above. Investment return and principal value will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. For performance data current to the most recent month end, please call 877.658.9473.
The Fed paused its process of lowering interest rates over the past three FOMC meetings; however, core inflation remains high at 3.3% and well above the Fed’s target of 2.0%, so we will likely see a slower pace of interest rate decreases than investors initially thought and may see a pause until late-2025 or the first part of 2026. That being said, some analysts are still expecting over 50 basis points of rate cuts before the end of the year.
The yield curve reversed its inversion in late 2024 but due to a resilient economy, the interest rates across the yield curve moved lower over the past quarter. Employment numbers remain steady and a recession is probably not on the immediate horizon this year so we probably need to expect higher interest rates for longer than we expected to see over the past year. Total job openings continue to tick down and Private (ADP) employment gains are showing signs of slowing as well but Consumer Sentiment, measured by the University of Michigan Consumer Sentiment Index, has steadily been moving lower in 2025 to 57 since it peaked at 74 at the end of 2024. It is well believed that first quarter GDP will be at or below 1% annualized growth but a few analysts are warning that GDP for the first quarter will actually be negative.
The global capital markets continue to face several geopolitical risks as we move into the second quarter of 2025, which could significantly impact investor sentiment and market stability. One key concern is the speed of policy changes coming from the Trump administration during his first 70 days in office as well as the effect of the Trump Tariffs on the US and Global economy. We are also still dealing with the ongoing war in Israel and against the terrorist proxies of Iran in the Houthi rebels. The Russia/Ukraine war appears to have reached a stalemate but neither side is showing any willingness to negotiate and end the fighting yet, even though President Trump is talking to both sides and pushing for an end to the war. Trade conflicts and tariffs with China will also introduce instability and raise concerns about the business environment in the next several months. Even with these headwinds, volatility in stock prices will remain high and may be driven by new issues that we haven’t considered yet. As usual, we will closely monitor global and domestic developments and assess their potential impacts on our investment strategies.
We are confident that we are still in the early innings of the bull market and even though it is disappointing to see another negative performance this quarter for several of our ETFs, we were pleased to see a few of our ETFs show slight outperformance to their secular benchmark. We are not surprised to see the profit-taking during the first few months of 2025 in the mega-cap growth stocks that have caused our ETFs to underperform their secular benchmarks during 2024 and will not be surprised if this negative trend in the first quarter turns into the correction of -10% or more that we have been warning about for the past several quarters. We still expect the broader large-cap market as well as the small- and mid-cap markets that have been ignored for most of the past two years show tremendous upside potential in the next 12 to 24 months. We are still facing the same headwinds from the last couple of years – inflation, high interest rates, the war in Ukraine, the war in Israel, and geo-political tensions with China, and a couple of new ones if the Trump Tariffs get implemented, so we need to remain patient and stay focused on long term opportunities.
Whatever may come, our Lord is still in control. We remain thankful for the provision, protection, and blessings that we receive from our Heavenly Father and are looking expectantly to what God has in store for the rest of 2025 and beyond.
We are thankful to each of you for bringing Glory and Honor to our Heavenly Father and our Savior Jesus Christ as you serve your clients through Biblically Responsible Investing.
Prepared by Darrell W. Jayroe, CFA, CFP®, CKA®
SENIOR PORTFOLIO MANAGER
for professional use only