Highlights:
- The S&P 500 saw a volatile April, swinging nearly 15% before ending the month with a modest -0.7% loss, mainly due to tariff uncertainties.
- Despite strong consumer spending, concerns emerged about sustainability, with early signs of weakness in manufacturing and travel, alongside negative sentiment levels similar to 2008.
- Companies gave mixed earnings guidance, citing tariff-related uncertainty as a major hurdle to forecasting and capital investment.
- Six of the eleven S&P sectors were up through April, highlighting the importance of long-term asset allocation and stock selection over market timing, even amidst volatility.
After a bumpy April ride which took the S&P 500 Index across an almost 15% range, the market ended nearly flat with a -0.7% loss. Year-to-date, the Index has dropped -4.9%. The main driver of this month’s volatility was the on-again, off-again Trump administration tariff impositions and the ensuing confusion over the end result in terms of both policy and impact. The environment was particularly hard on smaller stocks while international markets were strong. The volatility was also visible in the highly valued mega-tech stocks, whose April fortunes varied considerably.
Underneath the turmoil caused by the tariff situation, the economy showed resilience. While manufacturing slipped into contraction, consumer spending was strong. The main question was whether this was front-loading of purchases in anticipation of tariff-driven price increases or a more sustainable effect. Evidence in April pointed towards a softer consumer ahead. Hard data has yet to catch up with the broadly negative sentiment surveys, which in April touched the concerning levels hit during the 2008 financial crisis. Early indicators included dipping travel and airline utilization and reported contraction of fast food sales from lower and middle-income households.
The steepening of the bond curve pointed to near-term economic softening and the rising possibility of longer-term inflation. First quarter GDP growth was slightly negative, driven lower by increased imports as companies built inventory in anticipation of tariff-driven price increases. Projections for the remainder of the year are leaning towards positive if modest expansion, with economists noting increased risks for what could be a mild recession. While the Federal Reserve has hinted at two quarter-point rate cuts before year-end, the market is leaning toward four cuts, totaling 1%. However, Chairman Powell’s continued harping on data dependence leaves the possibility that an uptick in inflation could cause additional pauses. On the other hand, recent reports hint that the job market is softening, which, if accelerated, would put pressure on the Fed to lower. The prospect of inflation in a contracting economy—stagflation—continues to be the Fed’s worst fear.
As companies reported mixed earnings results for the first quarter, guidance could best be summarized as muddled. The tariff situation came up again and again on conference calls with executives explaining that confident guidance required unavailable clarity on the costs of doing business across borders. A slowdown in corporate spending and investment is one likely result. While tariffs are touted to revive domestic manufacturing, so far, companies are showing hesitance in making large capital investments amid shifting and uncertain policies.
It’s human nature to remember sharp down days better than recovery periods, but April has been a good case in demonstrating the complications of market timing. The fact that six of the eleven S&P sectors were positive for the year through April 30 suggests the value of staying the course. We continue to believe that appropriate asset allocation and careful stock selection are the best nostrums for the kind of volatile market we should be prepared to live with for the remainder of 2025.