Q1 2025: A Rocky Start For Financial Markets To Start The Year

As the first quarter of the year comes to a close, financial markets have earned themselves a much needed recap; the story of Q1 was largely characterized by cautious investor sentiment and uncertainty regarding tariff policy (2.0) from the Trump administration, and an increasingly weak consumer. Sweeping new tariffs and an obvious push by the new administration to lower the 10-year Treasury yield have sent shockwaves through global markets, with all U.S. indices plunging amid ramping recession fears.

At the time of writing—one trading week into an already historic month of April—the S&P 500 is down nearly 15%, with the tech-heavy NASDAQ dropping closer to 20%, nearly plunging it into a technical bear market. Amidst the major declines, market volatility has reached levels not seen since the sudden COVID-19 flash crash in March of 2020, as the VIX volatility index, commonly viewed as Wall Street’s fear gauge, has spiked nearly 150% (to a 4.5-year high) to start off the year.

On April 1st, President Trump announced across-the-board tariffs on imports from about 90 countries, as part of his “Liberation Day” executive order to “declare economic independence” and promote an America-first agenda. Although tariffs had been an integral part on the campaign trail, the severity of the move was largely unexpected, and has resulted in significant debate from both sides of the aisle. The push is arguably the most aggressive U.S. protectionist action dating back to the early 1930s, with economists drawing comparisons to the Smoot-Hawley Tariff Act of 1930. Indeed the U.S. has a long history with tariffs, but global trade has developed significantly over the last several decades, so it is yet to be seen if the tariffs will achieve success in reindustrializing the country. It is worth noting that more recently, President George W. Bush’s 2002 steel tariffs led to an estimated 475,000 job losses and a $2 trillion loss in S&P 500 market cap during their 21-month lifespan. Following Trump’s recent tariff announcement, JPMorgan Chase revised odds of a global recession to 60%, and warned of the potential impacts of retaliatory tariffs and global supply chain disruptions.

On a much quieter note, the new administration has also signaled a renewed focus on lowering the 10-year Treasury note, which is a benchmark rate of great importance in the economy, affecting everything from mortgage prices to the rate at which corporations borrow capital. Unbeknownst to many, the U.S. faces over $9.2 trillion in debt that is set to mature or be refinanced by the end of the year. That number in of itself makes clear the importance of aggressively lowering long-term rates. White House officials justifiably have recognized the importance of a flatter yield curve to finance manufacturing expansion and shield U.S. consumers from price hikes due to tariffs. The 10-year yield, which spiked to 4.8% in January, has since retreated significantly to 4.0%. Considering the massive levels of debt rolling over, the Trump administration will likely work toward reducing this number further into the mid-3% range through Q2.

As mentioned, equity markets have responded harshly. Although the sell-off has been broad in severity, consumer staples, retail, and industrials have led the decline. Unsurprisingly, these sectors are especially import-dependent, and tariffs will inevitably lead to margin compression and higher prices. As a representation of the whole retail sector, popular names such as Walmart and Target have each lost nearly a quarter of their value since mid-February, while Caterpillar and Deere have warned investors of rising steel costs for the foreseeable future. Technology stocks were also impacted due to significant exposure (for some) to Asian markets. Most notably, Apple, which relies on China for over 20% of its annual revenue, and as a hub for significant hardware production, fell greatly on the news. Semiconductor stocks such as Nvidia and AMD also saw weakness on tariff news and China’s retaliatory tariffs. As yet another signal of markets pricing in greater probability of a recession, investors flocked toward safe-haven assets, such as gold which rose to over $3,000 per ounce.

With Q2 on deck, markets will be watching more closely than ever—inflation data, consumer confidence reports, and corporate earnings will all play pivotal roles in dictating how the market continues to gauge the impact of a new tariff-full era. This quarter will also feature a Federal Reserve policy meeting in May, which will have investors on edge to see whether the Fed will be able to keep inflation under control, or if tariffs will pose a significant obstacle to the Fed’s 2% inflation target. Who doesn’t like a little volatility anyway?