Stocks Hit Correction Territory in March as Q1 Ends Lower
HIGHLIGHTS:
- Stocks: The S&P 500 reached a new all-time high in February, but weakness developed from that point. In March, the S&P 500 fell to its lowest level since September. The first quarter of 2025 was the first down quarter for the S&P 500 since Q3 2023 – breaking the streak of five quarters of gains.
- Bonds: Bonds, which started the year off strongly, were mixed in March. The 10-year U.S. Treasury, which closed February at a 4.24% yield, ended March only modestly lower at 4.23%. Overall, bonds had a solid quarter and helped offset some of the equity market weakness seen late in Q1.
- U.S. Economy: Concerns about the U.S. economy accelerated in March. Tariff fears have weighed on consumer confidence, and many prognosticators have cut economic growth estimates for 2025.
- Federal Reserve: The FOMC has not changed policy rates in 2025. However, the Fed’s Summary of Economic Projections (or SEPs) released in March showed the Fed is expecting lower economic growth and higher unemployment and inflation in 2025 than it did in its December release. The market is expecting three rate cuts this year. (Per CME FedWatch tool as of 3/31/25.)
EQUITY MARKETS
March was a challenging month for U.S. stocks across the board. However, quarterly returns are more nuanced when looking at the data. See Table 1 for March 2025, Q1 2025 and calendar year 2024 results.
Table 1 | Equity Markets
| Index | March 2025 | Q1 2025 | 2024 |
| S&P 500 | -5.63% | -4.27% | 25.02% |
| S&P 500 Equal Weight | -3.38% | -0.61% | 13.01% |
| DJIA |
-4.06% |
-0.87% |
14.99% |
| Russell 3000 | -5.83% | -4.72% | 23.81% |
| NASDAQ Comp. | -8.14% | -10.26% | 29.57% |
| Russell 2000 | -6.81% | -9.48% | 11.54% |
| MSCI ACWI ex U.S. | -0.23% | 5.23% | 5.53% |
| MSCI Emerging Mkts Net | 0.63% | 2.93% | 7.50% |
Different pockets of the equity markets had very different outcomes during the quarter. After years of lagging, international stocks had positive returns in Q1 while U.S. stocks were down. The large-cap growth leadership in U.S. markets reversed course to start the year, as the Nasdaq Composite had the worst results – down over 10% – for the major U.S. indices in the first quarter. Small caps, which had periods of strong performance in 2024, struggled in the first quarter of 2025, as well. Other areas of the U.S. markets were largely unchanged to start the year with the Dow Jones Industrial Average and the equal-weighted S&P 500 down less than -1% for the quarter. The results of the equal-weighted S&P 500 points to broadening occurring in the market outside of the narrow large-cap tech names, which have dominated in recent years. This quarter, diversification helped with international stocks offsetting some of the U.S. market weakness.
Fixed Income
The almost relentless rise in rates experienced during the fourth quarter of 2024 and into early January has reversed. The 10-year U.S. Treasury yield ended 2024 and January 2025 at 4.58%. However, that does not tell the whole story as rates rose to start the year and closed at a high of 4.79% on January 13. From that point, rates have fallen sharply, and they ended March at 4.23%. The decline in rates since those January highs has been a solid tailwind for bond returns. See Table 2 for bond index returns for March 2025, Q1 2025 and calendar year 2024.
Table 2 | Fixed Income Markets
|
Markets |
March 2025 | Q1 2025 |
2024 |
| Bloomberg U.S. Agg | 0.04% | 2.78% | 1.25% |
| Bloomberg U.S. Credit | -0.24% | 2.36% | 2.03% |
| Bloomberg U.S. High Yld | -1.02% | 1.00% | 8.19% |
| Bloomberg Muni | -1.69% | -0.22% | 1.05% |
| Bloomberg 30-year U.S. TSY | -1.39% | 4.28% | -8.09% |
| Bloomberg U.S. TSY | 0.23% | 2.92% | 0.58% |
Source: Morningstar. For illustrative purposes only. Past performance is not indicative of future results. Indexes are unmanaged and have been provided for comparison purposes only. No fees or expenses are reflected. You cannot invest directly in an index.
March saw periods of bond strength and weakness at times amid a volatile stock market. High-yield bonds tracked equities with strong results in January, but weaker results in March as stocks declined. High-yield bonds gave up about half of their returns for the year in March. Munis and longer-dated U.S. Treasuries, some of the more rate sensitive areas of the bond market, struggled in March. However, for the quarter, all pockets of the bond market outside of munis showed positive results. We believe rates on the front end of the yield curve will be pressured lower as the Fed cuts rates and longer rates will remain more volatile, but with broader pressure as well to the downside. Overall, the decline in rates has set up a solid backdrop for bond returns to begin 2025.
We maintain our long-standing position favoring credit versus pure rate exposure in this interest rate environment. We also believe the role bonds play in a portfolio – to provide stable cash flow and to help offset the volatility of stocks in the long run – has not changed. Bonds indeed helped offset equity market volatility in the first quarter. Furthermore, we believe that bond yields remain attractive. In our opinion, having an active bond management approach makes sense in these volatile times.
Economic Data Highlights and Outlook
Jobs: Although below expectations, nonfarm payroll additions were still solid in February at 151,000 additions. Expectations had called for a gain of 160,000. The unemployment rate ticked modestly higher to 4.1%, when it was expected to remain at the prior month’s level of 4.0%. Job openings improved in January from the end of 2024 with 7.74 million openings compared to estimates of 7.6 million. The ratio in the U.S. economy still favors job seekers with more jobs open than unemployed, but this data is lagged, and we will watch closely to see if hiring slows as concerns about the economy have ramped up amid recent tariff talk. Chart 1 shows the number of unemployed compared to the number of job openings in the U.S. Clearly, the number of unemployed has increased as the number of job openings has declined in recent years, but the U.S. economy is probably moving more toward an equilibrium state from an overly tight job market a couple of years ago.
Chart 1
Inflation: Inflation data released in the first half of March was largely better (lower) than expected for February. After coming off some rather “hot” readings for January, the February data was welcome. The consumer price index (CPI) was lower than expected on both a headline and core basis for the month and annual readings for February. Both readings were also lower than January’s year-over-year levels. The producer price index (PPI) was lower on a headline and core basis for the month and the year-over-year as well. However, January’s data was revised higher for both the core and headline PPI readings. The Personal Consumption Expenditure (PCE) price index, released near the end of the month, was in line with expectations on a headline basis for both the annual and monthly readings for February. However, the core PCE price index was 0.1% higher than expected for the month and the year and the annual number rose to 2.8% for February, which was higher than the revised higher level of 2.7% for January. Recall, the core PCE price index is the preferred inflation measure of the Fed. (For more specific data, please refer to the end of this report.)
Overall, we believe inflation continues to make progress toward the Fed’s ultimate stated goal of around 2% for the core PCE price index reading, but progress has stagnated in recent quarters. We expect this path to be bumpy, and tariff concerns have increased inflation fears and expectations, but we will wait to see if a real change in trend develops regarding inflation data. Chart 2 shows the core CPI and PCE price indices.
Chart 2
GDP: The final reading of Q4 2024 GDP came in modestly above expectations at 2.4%. The Atlanta Fed GDP Now estimate for the first quarter 2025 reading stands at a -3.7% decline (as of 4/1/25). This reading has been very volatile to start the year driven in part by the negative impact of net exports on GDP amid the tariff concerns with imports rising meaningfully in the first quarter.
Consumer Confidence: One economic data point that has been heavily affected by the tariff discussions and resulting economic uncertainty has been consumer confidence. Consumers are clearly saying they are not as confident in 2025 and are concerned with inflation continuing to impact prices. The University of Michigan consumer sentiment reading has fallen dramatically in recent months, while inflation expectations have soared. This has created a challenging backdrop for consumers. It is important to monitor what consumers “say,” in confidence surveys, however, we think it is more important to monitor what consumers “do.” We will monitor to see whether this drop in consumer confidence translates into less spending by consumers, but that has yet to be seen. Chart 3 shows the consumer sentiment and inflation expectation readings from the University of Michigan.
This data is delayed by one month on the chart, and we know the sentiment reading has fallen further and inflation expectations have increased from their preliminary March numbers. Per final March numbers, consumer sentiment had fallen to 57.0 and one-year inflation expectations had risen to 5.0%. Consumers are not feeling as confident these days. However, retail sales (ex. auto and gas) grew by 0.5%, which was better than the expected 0.4% gain in February, indicating a consumer spent in February after retail sales dropped in January.
Chart 3
Other Economic Data Points: The ISM Manufacturing reading for January was 50.9, surpassing estimates of 50.0 and moving into expansion territory for the first time in more than two years. As we often say, a month is not a trend, but it was a welcome sign to see this reading indicate the manufacturing sector was expanding. The ISM Manufacturing reading stayed above 50 at 50.3 for February, but that was below expectations of 50.7. (This reading did subsequently drop below 50 in March to 49.) The ISM Non-Manufacturing Index, which covers the much larger service industries in the U.S. economy, improved to 53.5, which exceeded expectations of 52.5. Recall, ISM readings above 50 reflect expansion and those below 50 indicate contraction.
Housing, which has faced a headwind from higher rates, seemed to improve somewhat with lower rates in February. Existing home sales, building permits and housing starts all exceeded expectations in February. Only new home sales fell short of expectations. Furthermore, housing starts, new and existing home sales all improved from their January marks with gains in February. Only building permits were lower than the previous month. Interest rates have dropped meaningfully since their 2025 highs from early January, but March saw rates choppier with only a modest decline in the 10-year U.S. Treasury.
After a couple of years of solid stock market gains with relatively little volatility, equity weakness in March and for the first quarter were unsettling for investors. However, on average, stocks have a 10% correction about every year, so the 10% peak to trough decline we experienced in the fourth quarter, while not pleasant, is a normal part of doing business in the stock market. Focusing on market fundamentals, we are seeing an economy that we believe will grow in 2025, a Fed that is cutting interest rates, a fairly reasonably valued stock market (especially after the recent drop in stock prices), and S&P 500 companies that are expected to grow their earnings in 2025 and 2026. We like that fundamental backdrop for 2025. Concerns about tariffs have ushered in volatility, and our analysts and portfolio managers will monitor industries and sectors that might be affected by tariffs as they are making portfolio decisions. However, we still want to see what actually gets implemented versus the headlines that are inundating investors all the time. As always, we believe it is imperative for investors to stay focused on their long-term goals and not let short-term swings in the market derail them from their longer-term objectives.
ECONOMIC DATA
| Event | Period | Estimate | Actual | Prior | Revised |
| ISM Manufacturing | Feb | 50.7 | 50.3 | 50.9 | — |
| ISM Services Index | Feb | 52.5 | 53.5 | 52.8 | — |
| Change in Nonfarm Payrolls | Feb | 160k | 151k | 143k | 125k |
| Unemployment Rate | Feb | 4.0% | 4.1% | 4.0% | — |
| Average Hourly Earnings YoY | Feb | 4.1% | 4.0% | 4.1% | 3.9% |
| JOLTS Job Openings | Jan | 7600k | 7740k | 7600k | 7508k |
| PPI Final Demand MoM | Feb | 0.3% | 0.0% | 0.4% | 0.6% |
| PPI Final Demand YoY | Feb | 3.3% | 3.2% | 3.5% | 3.7% |
| PPI Ex Food and Energy MoM | Feb | 0.3% | -0.1% | 0.3% | 0.5% |
| PPI Ex Food and Energy YoY | Feb | 3.5% | 3.4% | 3.6% | 3.8% |
| CPI MoM | Feb | 0.3% | 0.2% | 0.5% | — |
| CPI YoY | Feb | 2.9% | 2.8% | 3.0% | — |
| CPI Ex Food and Energy MoM | Feb | 0.3% | 0.2% | 0.4% | — |
| CPI Ex Food and Energy YoY | Feb | 3.2% | 3.1% | 3.3% | — |
| Retail Sales Ex Auto and Gas | Feb | 0.4% | 0.5% | -0.5% | -0.8% |
| Industrial Production MoM | Feb | 0.2% | 0.7% | 0.5% | 0.3% |
| Building Permits | Feb P | 1453k | 1456k | 1473k | — |
| Housing Starts | Feb | 1385k | 1501k | 1366k | 1350k |
| New Home Sales | Feb | 680k | 676k | 657k | 664k |
| Existing Home Sales | Feb | 3.95m | 4.26m | 4.08m | 4.09m |
| Leading Index | Feb | -0.2% | -0.3% | -0.3% | -0.2% |
| Durable Goods Orders | Feb P | -1.0% | 0.9% | 3.2% | 3.3% |
| GDP Annualized QoQ | 4Q T | 2.3% | 2.4% | 2.3% | — |
| U. of Mich. Sentiment | Mar P | 63.0 | 57.9 | 64.7 | — |
| Personal Income | Feb | 0.4% | 0.8% | 0.9% | 0.7% |
| Personal Spending | Feb | 0.5% | 0.4% | -0.2% | -0.3% |
| S&P CoreLogic CS 20-City YoY NSA | Jan | 4.80% | 4.67% | 4.48% | 4.52% |
—Source: Bloomberg: T=Third P=Preliminary
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