Highlights:
- The S&P 500 fell -5.6% in March, bringing the year-to-date loss to -4.3%, driven by concerns over tariffs and economic uncertainty.
- Despite the downturn, seven of the eleven S&P 500 sectors remained positive for the year, with Energy leading and Technology, Consumer Discretionary, and Communication Services lagging.
- Bonds outperformed equities, with the U.S. Aggregate Index up 2.8% year-to-date, reflecting expectations of potential Federal Reserve rate cuts.
- Falling consumer and business confidence may slow economic activity, with preliminary data suggesting negative GDP growth in Q1.
Our February observation of investment uncertainty has morphed in a month into market cliché. This environment dragged the S&P 500 Index to a -5.6% loss in March, taking the year-to-date and first quarter return to -4.3%. Consumer and business sentiment plummeted, reflecting a number of concerns topped by the threat of tariffs and their repercussions. For much of March, investors looked to April 2 for clarity, the date President Trump promised to announce tariff policies. We held this letter for this moment, but as many feared, the revelations raised more questions than they answered. One element seemed clear: the size and breadth of the initial tariffs surpassed expectations, and this was not a market positive. The likelihood of retaliation and the expectations of unpredictable nation-by-nation negotiations were widely unsettling.
But we have to emphasize that the gloomy mood over March returns was not entirely justified. Seven of the eleven S&P 500 sectors remained positive for the year, and the broader market did better than the indices. Just as the megacap tech names had driven the market upward in 2024, they led the recent retreat, leaving the year-to-date equal-weighted S&P 500 just fractionally lower. The trailing sectors for the month and quarter were Technology and Consumer Discretionary, followed by Communication Services. The top performing sector was Energy, while the defensive sectors of Consumer Staples and Health Care beat the market handily. Midcap and small-cap stocks underperformed.
Bond investments generally outperformed equities for the month and quarter, with the U.S. Aggregate Index up 2.8% year-to-date. Rates were down across the curve for the quarter, but most pronounced at the front end in the one-to-three-year range. This reflected the consensus that the Federal Reserve was still likely to drop rates twice more this year, although sticky inflation could give the board pause. The ending ten-year Treasury yield of 4.2% was well above the 2024 lows of 3.6% and suggested that bond investors were not fearing an impending recession.
Looking forward, we are among the many who see more fog than clarity. If we can clear some of the tariff air over the next few months, the prospect of lower regulation and taxation could be an economic boost in the second half of the year. On the other hand, dipping consumer and business sentiment can become self-fulfilling if investors retreat from the stock market and consumers step back from the consumer marketplace. Should the new tariffs drive prices upward, as the CEOs of major retailers project, consumer sentiment is unlikely to rebound. Preliminary numbers suggest negative GDP growth in the first quarter and portend a challenging year.
The prevailing uncertainty has already been felt in corporate capital expenditure spending and may well bleed over to staffing. The kind of massive manufacturing investiture that President Trump triumphs as a tariff windfall may indeed take place, but will likely not have an impact for years. In the meantime, the disparate sector and company returns of March suggest to us that we are in a period where careful security selection is paramount.