April Market Considerations: Inflation, Tariffs, and Volatility

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Well, this is quite a time to write an economic commentary - we’re now on the third draft in the last week with the constant back and forth. 2025 began with normalized inflation, strong employment, steady growth, earnings above expectations, and limited uncertainty in terms of business operations. Fast forward three months, tariffs are on again off again somewhere between 0-145% (China) depending on negotiation status, and uncertainty in business and markets rivals COVID–a true test even for a resilient economy. As bi-lateral trade negotiations unfold, inflation, employment, and fundamental readings remain steady. It’s impossible to know how long it will take for these negotiations to resolve, but the stakes are high and we expect they will. Business, people, and markets loathe uncertainty. It’s likely that volatility will continue as we seek clarity over the next 90 days.

Normally, we dive right into index performance and quarterly investment themes, but it’s a good time to step back and anchor ourselves in the core philosophy we’ve harped on since day one. First, investments must be considered with the right time horizon. In equity markets, 47% of days are down and 53% are up over the past century. Every year, on average, a pullback of 10%-20% occurs within the equity markets–even in years that end with a net positive return. Bear market drops of 20% or more, occur on an average of once every 4.8 years. The causes are never singular, and they’re unpredictable (Brexit, Silicon Valley Bank, Japan Fed, COVID, Inflation, Military Invasions, *pick your crisis*). Equity increases are expected over time, not ALL the time. Further, remember the power of diversified portfolios with equities tilted toward companies with strong profits relative to price, extended beyond US borders and the dollar, complemented by shorter-term, quality fixed income. A diversified allocation developed in line with your personal financial plan is the best opportunity to temper and take advantage of volatility, while maintaining long-term exposure for expected stock returns over time. Now, let’s review the current status of markets.

The first quarter was a story of fits and starts for the U.S. stock market, with International stocks, Emerging stocks, and Bonds outperforming by notable margins.

• International Stocks (MSCI EAFE ): +7.01%
• Emerging Market Stocks (MSCI Emerging Index): +3.01% Q1
• U.S. Bonds (Bloomberg Barclays Aggregate Index): +2.78% Q1
• U.S. Stocks (Russell 3000): -4.72% Q1
• U.S. Small Cap Stocks (Russell 2000): -9.48% Q1

The U.S. is now in a bear market, and we must remember the best days and years follow the challenging days and years. April 9th was the best market day in 24 years. There are countless examples of this. We’ll also point to March 2020. Markets were down 30%. The Dow Jones then increased 11.37% on March 24th alone. The entire annual return was 9.39%. Your full year’s return can happen in a day or a week. It’s imperative to be around for those moments.

The economy is projected to shrink -2.4% in Q1, due to imports. The U.S. imported $276 Billion more than exported, a record imbalance in January and February, swinging Gross Domestic Product (GDP) to contraction. For comparison, GDP would have come in at +2.4% if the trade imbalance was at a normal level. The uncertainty of tariffs prompted business owners to accelerate purchases to lock in certain prices. Consumer spending reflects approximately 70% of total GDP output, but trade activity can vary dramatically quarter to quarter, swinging the calculation as it did in Q1. This does not mean recession, which would require contraction of two straight quarters by multiple measures, including a dramatic change to unemployment and consumer spending. Given the stockpile accrued in Q1, next quarter's trade result is expected to swing in the opposite direction. The GDP reading for the first six months combined will be a more reliable measure.

Just as in 2024, wage growth (4.3%) outpaced inflation (2.4%) in Q1, meaning goods and services in the U.S. became cheaper in real terms. As mentioned last quarter, tariffs are a major threat to these normalized inflation numbers, and implementation would drive an expectation of inflation moving back up to over 4% for the year. Businesses will seek clarity this quarter before being able to implement reliable new price plans –only then will the impact be fully understood.

Absent negotiation to free up trade zones, today’s tariffs are estimated to slow the pace of growth -0.8% to -1% on the U.S. economy, while boosting inflation. It’s no secret that tariffs are harmful and create lower lows during downturns. The recent drop in equity markets rhymes with the impact of the Trump tariffs enacted in Q4 2018, and has triggered business uncertainty not seen since the Covid lockdowns. Fortunately, though China has escalated, the free trade agreement with Canada and Mexico is intact, and bi-lateral negotiations with the EU and numerous other trade partners are in progress during this 90 day pause.

Which brings us to the Federal Reserve, which is now expected to reduce rates four to five times this year to balance its dual mandate: inflation and unemployment. Having engineered the soft landing, the Fed faces the risk of stoking inflation while maintaining employment levels. We are quick to jump to conclusions on the Fed, but they will act as the data warrants, not because of expectation changes or leading indicators like equity markets. Inflation is now 2.4%, and the unemployment rate remains historically low at 4.2%. The good news is that price increases due to tariffs can be unpacked within the data, and they’ll separate what is due to money supply vs. supply chain realignment (in short, tariff inflation may not stop them from cutting rates). While incremental rate reductions are more probable now, don’t expect major shifts to policy if the inflation rate remains below historical averages and employment stays level.


There are endless sayings about predicting the future, especially with investing. “The best way to walk on broken glass is to start with a crystal ball. “There are no wealthy hedge fund investors, only wealth hedge fund managers.” “Timing has a great track record of eroding wealth.” My favorite is, “I’m the one who predicted 9 of the last 2 recessions.” As we always say, your personal headlines are most important, and prognostication is perilous. Please let us know if any of your circumstances have changed so we may adjust accordingly! We look forward to our next conversation.

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Sources: Ycharts, ATL Fednow, Fred.com, Vanguard.com, Dimensional.com

This material represents an assessment of the market and economic environment at a specific point in time and is not intended to be a forecast of future events, or a guarantee of future results. Forward-looking statements are subject to certain risks and uncertainties. Actual results, performance, or achievements may differ materially from those expressed or implied. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice meeting the particular investment needs of any investor. Past performance does not guarantee future results.

Asset Allocation does not guarantee a profit or protect against a loss in a declining market. It is a method used to help manage investment risk.

Index Disclosures:

Indices are unmanaged and investors cannot invest directly in an index. Unless otherwise noted, performance of indices do not account for any fees, commissions or other expenses that would be incurred. Returns do not include reinvested dividends.

Index Definitions:

The Consumer Price Index (CPI) is a measure of inflation compiled by the US Bureau of Labor Studies.

Barclays U.S. Aggregate Bond Index: The Bloomberg Barclays U.S. Aggregate Bond Index is an unmanaged index of fixed rate debt securities rated investment grade or higher by Moody’s, Standard & Poor’s, or Fitch rating services. All issues in the index have at least one year to maturity and an outstanding par value of at least $25 million to $1 billion based on the type of security. Indices are not available for direct investment and do not reflect any fees that may be charged.

S&P 500®: The S&P 500® index is an unmanaged index of 500 companies used as a representative sample of the United States economy. The S&P 500® index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

MSCI EAFE: The MSCI Ex-US index is an unmanaged index used as a representative sample of the global developed economy outside of the United States and Canada. The MSCI EAFE index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

MSCI Emerging Markets: The MSCI Emerging Market index is an unmanaged index used as a representative sample of the global emerging market economy outside of the United States. The MSCI Emerging Market index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

The Russell 2000 index is an unmanaged index of the 2000 smallest companies in the Russell 3000 index. The Russell 2000 Index is used as a representative sample of the small companies in the United States economy. The Russell 2000 index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.

The Russell 3000 index is an unmanaged index of 3000 companies in the United States. The Russell 3000 Index is used as a representative sample of the United States economy. The Russell 3000 index consists of only stock holdings. Indices are not available for direct investment and do not reflect any fees that may be charged.