March 2025 Monthly Commentary

MARKET OVERVIEW:

March 2025 marked a volatile month across global markets. Investors faced heightened uncertainty as mixed economic data, a potential global trade conflict, and earnings reports from major corporations shaped the landscape. While equity markets experienced a significant pullback, the fixed income sector saw relative stability as a "flight to safety" took hold.

EQUITY MARKETS PERFORMANCE:

In March 2025, U.S. equities took a sharp downturn. The S&P 500 recorded a 5.63% decline, its worst monthly performance since December 2022. The Nasdaq Composite dropped even more, falling by 8.14% for the month, while the Dow Jones Industrial Average slipped 4.06%.

Tech sector struggles: The technology sector was particularly hard-hit. Major players like Tesla and Nvidia saw large declines in their stock prices, attributed to the ongoing uncertainty regarding global supply chains and consumer demand. This underscores how sensitive high-growth sectors are to shifts in economic conditions and investor sentiment."

Energy sector stands out: On the other hand, the energy sector bucked the trend, posting a strong 9.3% increase. The rise in energy prices, driven by geopolitical tensions and supply concerns, helped boost the stocks of companies in the oil, gas, and renewable energy spaces.

Declines in consumer discretionary: Conversely, the consumer discretionary sector, which includes non-essential goods and services, led the downside with a 8.91% decline, reflecting weakening consumer sentiment and the potential impact of higher interest rates on consumer spending. Communication services stocks also struggled, dropping 8.28% amid a tightening advertising environment and concerns about growing competition and regulatory challenges.

FIXED INCOME MARKETS PERFORMANCE:

While equities were under pressure, the fixed income markets provided a safe haven for investors. The benchmark 10-year U.S. Treasury yield closed at 4.21% on March 31, 2025, showing some stability despite the broader market turbulence. This was a slight increase from earlier in the month when yields briefly dipped below 4.16% (intraday) due to the market’s reaction to trade concerns.

Flight to quality: The stability in the bond market reflected the growing demand for safer assets amid concerns about an impending global recession. Investors flocked to government bonds as a hedge against stock market volatility and the potential risks posed by escalating geopolitical tensions, particularly related to new tariffs introduced by the U.S. government.

Yield curve steeper: The difference between the 2-year Treasury yield (which ended the month at 3.88%) and the 30-year Treasury yield (closing at 4.57%) continued to widen, signaling investor concerns about long-term economic growth and a potential slowdown.

Investment grade corporate bonds benefitted from lower rates, but underperformed risk-free assets, as corporate spreads widened slightly. Volatility in equity markets caused some new issuance to be tabled, as buyers tapered enthusiasm for corporate bonds with historically low risk premiums. Higher beta sectors including US high yield bonds and EM bonds (US $ denominated) had slightly negative performance for the period.

Agency MBS (Government backed Mortgage-Backed Securities) rallied in concert with the US Treasury market, as the current (par) coupon 30yr fixed-rate mortgage yield fell 33bps over the quarter. Spreads on current coupon 30yr MBS versus 10-year Treasuries widened slightly by 4.8bps to finish March at +130.5bps over the Treasury benchmark, leaving them just slightly wider than the running 5-year average (refer to chart).

Tax free municipal bond prices fell, and performance dropped by over 1.5% for the broad sector. Robust new issuance, and lower than usual reinvestment was an important driver in underperformance versus other fixed income counterparts. Political discussions about ending tax exemption, tariffs, and state and local economic uncertainty were also factors. We would expect to see better buying in the coming months, as the relative value ratios of municipal bonds versus comparable treasury bonds have become more attractive than they have been in years.

KEY DRIVERS OF VOLATILITY:

U.S. Tariffs and Trade Tensions: A major factor contributing to the heightened volatility was the re-imposition of U.S. tariffs on certain imports, which raised fears of a new trade war reminiscent of the tensions seen in the previous decade. The imposition of these tariffs weighed heavily on the market, pushing risk assets lower as investors feared further escalation and disruptions in global supply chains. There were concerns that such policies could lead to inflationary pressures and higher costs for consumers.

Mixed Economic Data: Economic reports during March showed mixed signals. While consumer spending showed resilience, reports on business investment and manufacturing data indicated a slowdown. The U.S. consumer confidence index dropped in March, signaling that households were becoming more cautious amid economic uncertainty.

Geopolitical Uncertainty: Geopolitical issues, including rising tensions in Eastern Europe and trade policies from major global powers, continued to weigh on investor sentiment. The market’s reaction to these concerns contributed to fluctuations in equity and bond markets, as investors tried to navigate the shifting landscape.

Earnings Season: The end of the first quarter also saw mixed earnings reports, which added to the uncertainty. While some large corporations posted better-than-expected profits, others, particularly in the tech and consumer sectors, reported weaker earnings, contributing to market volatility. This divergence further deepened investors' concerns about a possible slowdown.

KEY TAKEAWAYS:

Market volatility will likely continue as investors weigh the risks of inflation, interest rates, and geopolitical tensions.

Fixed income markets may continue to attract inflows as flight to quality, while equities, particularly in tech and consumer discretionary sectors, may remain under pressure due to economic headwinds. In early April, the extent of reciprocal tariffs will become clearer, which will drive investor sentiment and shed some light on the extent of a “stagflationary” environment.