Monthly Market Update – March 2025

Key Takeaways

• POLICY UNCERTAINTY REMAINS PERVASIVE The U.S. economy’s foundation remains strong, but policy uncertainty, particularly around tariffs, is negatively affecting sentiment among households and businesses. Despite S&P 500 earnings exceeding expectations in Q1 2025, the index has fallen due to unpredictable tariff policies frequently mentioned in earnings calls.
• THE IRONY OF UNCERTAINTY The U.S. Economic Policy Uncertainty Index is approaching levels seen during the Covid crisis, but research from Strategas shows that higher uncertainty has historically led to better investment returns over the subsequent 3, 6, and 12-month periods.
• CAN SPRING SEASONALITY SAVE STOCKS? It has been a very rocky start to the year for U.S. stocks, with the S&P 500 Index falling in March, following a negative February as well. Historically, April has been a strong month for the index but the first week of April 2025 finds the S&P 500 in correction territory.
• SOFT DATA VS. HARD DATA March saw an atypical divergence between economic soft data versus hard data. Soft data, driven by surveys and sentiment, has turned down while hard data, which reflects actual economic activities and outcomes, has been resilient and is trending up.
• DIVERSIFICATION IS HELPING PORTFOLIOS AGAIN In 2025, diversification has proven helpful for managing investment risk and enhancing returns. While U.S. large-cap stocks outperformed other asset classes in 2023 and 2024, the return of market volatility in 2025 highlighted the importance of a balanced portfolio.

Market Summary

Asset Class Total Returns

Source: Bloomberg, as of March 31, 2025. Performance figures are index total returns: US Bonds (Barclays US Aggregate Bond TR), US High Yield (Barclays US HY 2% Issuer-Capped TR), International Bonds (Barclays Global Aggregate ex USD TR), Large Caps (S&P 500 TR), Small Caps (Russell 2000 TR), Developed Markets (MSCI EAFE NR USD), Emerging Markets (MSCI EM NR USD), Real Estate (FTSE NAREIT All Equity REITS TR).

The first quarter of 2025 has certainly been a bumpy ride for investors following a relatively smooth path in 2024. There were only three negative months in 2024 and the first didn’t occur until April. Although we started the year with a positive January, most major U.S. stock indices were down modestly in February and then sank -5% or more in March. For the headline S&P 500 Index, it was down -5.6% in March, its worst monthly total return since December 2022. That resulted in a -4.3% first quarter total return, which was the first negative quarter since the third quarter of 2023 – breaking a streak of five winning quarters. It already seems a distant memory that the S&P 500 notched two new all-time highs in the first week of February. Unfortunately, all the reasons for the weakness in March—rising inflation pressures, signs of slowing growth, and the uncertainty of tariff policies—all have persisted in the first week of April. In the Can Spring Seasonality Save Stocks? section below, we discuss the historically strong tendency for April to be a positive month, but of course it’s been anything but positive for the first week of April following the announcement of the Trump administration’s unexpectedly aggressive proposed tariffs on virtually all U.S. trading partners. 

The silver lining to the rocky start of 2025 is that investors are once again realizing the benefit of diversification. U.S. stocks, particularly U.S. large growth stocks, have been a top performing asset class since the bear market of 2022. But so far this year, non-U.S. stocks and bonds are outperforming U.S. stocks. Developed market international equities (as measured by the MSCI EAFE Index) were down just -0.4% in March and were positive in January and February. For the first quarter, the MSCI EAFE Index beat the S&P 500 Index by more than +11%. It was the best quarter of outperformance of non-U.S. stocks over U.S. stocks since Q2-2002. That puts 2025 on pace to be the best year of relative performance for developed international stocks since 2006 when EAFE outperformed the S&P by +10.5% (part of a streak of six consecutive calendar years of outperformance from 2002 to 2007). The MSCI Emerging Markets Index also outperformed the S&P 500 in March with a +0.6% total return and were also slightly positive in January and February, putting them up +3.0% for the first quarter. 

U.S. bonds are also helping mitigate the drop in stocks for diversified investors. The widely tracked Bloomberg U.S. Aggregate Bond Index (“the Agg”), which includes investment-grade corporate bonds and mortgage-backed securities as well as Treasurys, was essentially flat in March with a just-barely positive +0.04% total return for the month. But it was positive in January and February as well, helping it to a +2.8% total return for the first quarter. That put the Agg +5.7% and +7.1% better than the S&P 500 for March and Q1, respectively. That was the best performance of bonds over stocks on both a monthly and quarterly basis since June 2022.

The benefit of diversification may not be exciting, and probably isn’t fodder for cocktail conversations, but it does help to take the sting out of a volatile period for stocks. The elevated uncertainty stemming from the volatile nature of U.S. trade policy has dampened growth expectations in the U.S. economy and has increased the risk of recession—though that is still far from a certainty. As detailed further in the Hard Data vs. Soft Data section, survey data related to consumer confidence and small business sentiment has suffered from the shifting expectations and severity of new U.S. tariffs. Fortunately, so far in 2025, much of the hard data for things related to the labor market, consumer spending, and industrial production have held up well and aren’t indicative of recessionary conditions.

Source: Bloomberg. Data as of March 31, 2025.
Price Returns for Equity, Total Returns for Bonds.
* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

Quick Takes

POLICY UNCERTAINTY REMAINS PERVASIVE

The underlying growth drivers of the U.S. economy remain solid, but policy uncertainty is souring sentiment among households and businesses. We shared a view of this growing uncertainty in the February Monthly Market Update and below, via FS Investments, we see another example of how trade policy uncertainty has hit historic levels that coincide with the proliferation of the mentions of “tariffs” in corporate earnings calls. In the first quarter, as S&P 500 earnings reports materially outpaced expectations (for Q4-2024 earnings), the S&P itself declined -4.3%, and sank further in the first week of April. The clear culprit was the unpredictable U.S. tariff policies, which were frequently cited by company executives during those earnings calls. Still, investors need to keep in mind that gross trade equates to only about 25% of Gross Domestic Product (GDP), and disruptions are likely to be more impactful for the trading partners of the United States than to the U.S itself. If businesses and consumers can get clarity and tariff policy ultimately settles at a lower negotiated level than the unexpectedly high April 2 “Liberation Day” levels, the U.S. economy is positioned to maintain a healthy pace of growth.

Corporate Mentions of ‘Tariffs’ and Trade Policy Uncertainty spike to Record Levels

Tariff talk permeates earnings call as Trade Policy Uncertainty surges

THE IRONY OF UNCERTAINTY

The U.S. Economic Policy Uncertainty Index (the parent index of the Trade Policy Uncertainty Index above) is nearing the levels of overall economic policy uncertainty during the Covid pandemic. Research firm Strategas analyzed the history of the Economic Policy Index and found that investors have historically been rewarded for investing in higher periods of uncertainty. As seen in the chart to the right, for the forward 3, 6, and 12 periods, returns were higher for each bucket of higher uncertainty. It’s also worth considering what happens when one seeks the very least amount of uncertainty. When was the “least uncertain” time in the last 40 years? It was July 2007, meaning the “least uncertain” time was the eve of the Great Financial Crisis. This reveals an uncomfortable truth of investing: the world is always an uncertain place, and the irony for investors is that more uncertainty has resulted in higher future returns.

Historic Jump for Policy Uncertainty Rivals COVID Era

Source: Economic Policy Uncertainty (EPU), Strategas.

CAN SPRING SEASONALITY SAVE STOCKS?

For many Americans, April generally conjures up thoughts of springtime, baseball, and tax time.  For traders and investors, it’s a time to focus on the just-completed first quarter earnings and company guidance for the just-commenced second quarter. Whatever, springtime conjures up for you, it has historically meant a very favorable month for U.S. equities. The chart below from Jeffrey Hirsh at Stock Trader’s Almanac shows most major U.S. stock indices for the month of April and covers both the recent trailing 21-year period (2004 to 2024) as well as the post-election years from 1950 through 2024. Over the 21-year period, historically April has had a nearly perfect batting average for positive gains and steadily building those gains from the first trading day to the last day with only the occasional, and minor, blip. Post-election years haven’t typically opened as strong right out of the gate, but early dips tend to be shallow and brief. Unfortunately, for the first week of April 2025, at publication deadline, these indices have seen declines beyond what most investors would consider shallow. As of April 4, most of the indices are at or near the -10% correction level. Tariff and trade turmoil is clearly consuming investor attention and souring the typical strong seasonal tailwind. Markets will be looking for clarity and progress on trade negotiations to get back on script for this Spring.

Can April Save the Day before May?

Recent 21-Year (2004-2024) & Post-Election Years (1950-2021) April Performance

Source: Stock Trader’s Almanac.

SOFT DATA VS. HARD DATA

Economic “soft data” and “hard data” are two distinct types of information used to gauge economic conditions, but it is not a commonly known distinction. Soft Data generally includes surveys, sentiment indicators, and expectations. Examples are consumer confidence surveys, business outlook surveys, and Purchasing Managers’ Indexes (PMIs). Soft data reflects what consumers and businesses are thinking or feeling about the economy. In contrast, Hard Data consists of measurable and objective metrics such as Gross Domestic Product (GDP), employment figures, retail sales, and industrial production. Hard data reflects actual economic activities and outcomes. Recently, pervasive uncertainty has begun to impact sentiment for both consumers and businesses. In 2025, through April 4, we’ve seen a bit of a tug-of-war between soft data and hard data, and it’s keeping investors on their toes. Consumer sentiment has taken a hit—surveys like the University of Michigan’s Consumer Sentiment Index have been trending down, with respondents worried about affordability and economic uncertainty. Business surveys, like the PMI, have also flashed warning signs, dipping into contraction territory (below 50) in some months, and hinting at pessimism over tariffs, inflation, or policy changes.  Meanwhile, the concrete numbers tell a steadier story. Jobs reports have shown solid growth—think non-farm payrolls adding many more than expected new jobs in March. GDP growth, while not blockbuster, was unexpectedly revised higher for Q4 2024 and is expected to come in around 1-2% annualized for Q1 (based on Wall Street consensus estimates). Retail sales and industrial production have held up too, not screaming recession. As investors, we don’t want to panic over every gloomy survey, but we don’t want to ignore them either. We will look for confidence to stop its slide and continue to monitor the hard data to see if it holds up. In 2025 so far, the hard data’s resilience suggests the economy’s tougher than the mood implies, but we will keep our eyes on both.

Uncertainty is Hurting Sentiment-Drive Soft Data, but Hard Data has been Resilient

The gap between hard data and soft data was conspicuously wide in March

Source: Bloomberg.

DIVERSIFICATION IS HELPING PORTFOLIOS AGAIN

In 2025, diversification has proven to be a helpful strategy for managing investment risk and enhancing returns. In 2023 and 2024 there were very few periods of elevated volatility and U.S. stocks, specifically U.S. large capitalization stocks, outperformed most other major asset classes. This prompted many to question the efficacy of diversification. But as pronounced market volatility returned in 2025—particularly with significant drawdown in the assets that performed the best in 2023 and 2024 like large cap U.S. stocks—the importance of an appropriately balanced portfolio that includes a mix of international stocks, bonds, real estate, and other assets in addition to just U.S. stocks. This approach has helped mitigate risks associated with market corrections for decades and has offered better risk-adjusted returns compared to a concentrated investment in only U.S. large cap. Overall, diversification has helped investors navigate the uncertainties of 2025, providing a more stable and resilient investment approach which ultimately results in a lower dispersion of returns and a higher probability of success in achieving your long-term financial goals.

Diversification Can Provide Defense During Times of Extreme Volatility

Asset Class Total Returns (Year-to-Date 2025)

Source: Bloomberg. Data as of March 31, 2025.
Performance figures are index total returns: US Bonds (Barclays US Aggregate Bond TR), US High Yield (Barclays US HY 2% Issuer-Capped TR), Large Caps (S&P 500), Small Caps (Russell 2000), Developed Markets (MSCI EAFE NR USD), Emerging Markets (MSCI EM NR USD), Real Estate (FTSE NAREIT All Equity REITS).

Asset Class Performance

The Importance of Diversification. Diversification mitigates the risk of relying on any single investment. It offers many long-term benefits, such as lowering portfolio volatility, improving risk-adjusted returns, and helping investments to compound more effectively.

Source: Bloomberg.

Asset‐class performance is presented by using market returns from an exchange‐traded fund (ETF) proxy that best represents its respective broad asset class. Returns shown are net of fund fees for and do not necessarily represent performance of specific mutual funds and/or exchange-traded funds recommended by The Retirement Planning Group. The performance of those funds may be substantially different from the performance of the broad asset classes and to proxy ETFs represented here. US Bonds (iShares Core US Aggregate Bond ETF); High‐Yield Bond (iShares iBoxx $ High Yield Corporate Bond ETF); Intl Bonds (SPDR® Bloomberg Barclays International Corporate Bond ETF); Large Growth (iShares Russell 1000 Growth ETF); Large Value (iShares Russell 1000 Value ETF); Mid Growth (iShares Russell Mid-Cap Growth ETF); Mid Value (iShares Russell Mid-Cap Value ETF); Small Growth (iShares Russell 2000 Growth ETF); Small Value (iShares Russell 2000 Value ETF); Intl Equity (iShares MSCI EAFE ETF); Emg Markets (iShares MSCI Emerging Markets ETF); and Real Estate (iShares US Real Estate ETF). The return displayed as “60/40 Allocation” is a weighted average of the ETF proxies shown as represented by: 30% US Bonds, 5% International Bonds, 5% High Yield Bonds, 10% Large Growth, 10% Large Value, 4% Mid Growth, 4% Mid Value, 2% Small Growth, 2% Small Value, 18% International Stock, 7% Emerging Markets, 3% Real Estate.

* The term basis points (bps) refers to a common unit of measure for interest rates and other percentages in finance. One basis point is equal to 0.01%. Bond prices and bond yields are inversely related. As the price of a bond goes up, the yield decreases.

Chris Bouffard is CIO of The Retirement Planning Group (TRPG), a Registered Investment Adviser. He has oversight of investments for the advisory services offered through TRPG.

Disclaimer: Information provided is for educational purposes only and does not constitute investment, legal or tax advice. All examples are hypothetical and for illustrative purposes only. Past performance of any market results is no assurance of future performance. The information contained herein has been obtained from sources deemed reliable but is not guaranteed. Please contact TRPG for more complete information based on your personal circumstances and to obtain personal individual investment advice.