Weekly Investment Perspective

U.S. equities tumbled lower for the fourth straight week as the S&P 500 briefly dipped into correction territory with a drawdown over 10% before rebounding higher on Friday to close the week. The escalating trade war remains the primary point of worry among investors, and the uncertainty is also weighing on confidence among consumers and business owners. This dampened optimism overshadowed some positive economic readings from last week that exhibited resilience in the labor market alongside cooling inflation. For the week, the S&P 500 fell 2.2% while the Nasdaq Composite and Dow Jones lost 2.4% and 3.0%, respectively. Meanwhile, international stocks continued to hold up a bit better with the MSCI ACWI ex-US index losing 1.1% last week and still holding on to solid year-to-date gains with a boost from weakness in the U.S. dollar.

Recent data on sentiment among both consumers and small business owners are indicating a more cautious mood amid the whiplash from back-and-forth tariff discussions. Last week’s reading of the NFIB Small Business Index, saw business optimism retreat lower and the uncertainty index jumped to the second-highest level on record. As a result, the percentage of business owners indicating plans to increase investment in the year ahead has fallen sharply as policy volatility is “making it difficult for companies to plan ahead”. Meanwhile, the University of Michigan’s Consumer Sentiment Index also ticked lower than expected on Friday with inflation concerns and employment prospects among the most prominent headwinds. Consumer inflation expectations for the next year spiked to 4.9% in March, up from 2.8% in December, and the share of consumers expecting higher unemployment in the next year jumped to levels not seen since the global financial crisis.

While sentiment survey data (sometimes referred to as “soft” data) points to a weaker outlook ahead, the “hard” economic data remains somewhat at odds with sentiment readings as it has painted a more resilient, albeit cooling, picture. In contrast to rising consumer inflation expectations, February’s CPI reading came in cooler than expected with the headline index moderating to 2.8% year-over-year from 3.0% in January, and core CPI excluding food and energy fell from 3.3% to 3.1%. Additionally, the number of job openings also surprised positively at 7,740k job postings in February compared to expectations for 7,720k openings according to the Job Openings and Labor Turnover Survey (JOLTS). However, it is important to note that tariffs and Federal job cutbacks were not captured in the February data and so the strength in the hard data will likely dissipate somewhat in the coming months.

With stocks stumbling and confidence wavering, there has been increased chatter about recession risks. One of the most watched indicators of economic weakness is high yield bond spreads, which is the extra yield investors demand to hold riskier corporate (junk) bonds over safer Treasury bonds. These spreads have begun to widen in recent weeks and touched a 6-month high last week, which often signals that investors are turning more risk-averse. However, it’s important to emphasize context: credit spreads still remain at very low levels by historical standards. Even after creeping up, current spreads are still too tight to indicate serious stress or a looming default wave. So, rising spreads are a development to watch, but they are far from the panic levels seen in past pre-recession periods.

Overall, current hard economic and market data does not point to the U.S. being in or near recession, but sentiment data does point to greater vulnerability for economic weakness ahead if policy uncertainty persists and dampens consumption and investment activity. Extended stock market weakness can also reinforce more tempered consumer behavior as American households are significantly overweight to domestic equities and changes in wealth can affect discretionary purchases and investment, especially among the higher income households that account for a growing proportion of overall U.S. consumer spending. This “wealth effect” can become a negative feedback loop with rising consumer cautiousness weighing on corporate profits and stock returns, which in turn further depresses consumer wealth and sentiment. At this point, consumer spending has cooled in recent months but remains on strong footing, as does consumer balance sheets in aggregate.

Amid the growing concerns on economic growth, this week’s Federal Reserve meeting will be heavily scrutinized by market participants. It is broadly anticipated that the central bank will keep its policy rate unchanged (market expectations reflect just a 1% chance for a rate cut at this meeting according to the CME FedWatch Tool); however, Fed members’ assessment and communication of current economic conditions will be crucial for setting the tone for the rest of the year as the Fed tries to navigate economic growth challenges and stubborn inflation stuck above target. A hawkish tone that signals leaning on their restrictive policy stance would likely add downward pressure for equity markets.

As we communicated in the 2025 Long View outlook report at the start of the year, our investment team believes being disciplined on diversification is now more critical than ever with market concentration near historical record levels after several years of dominant performance from large U.S. tech stocks. Additionally, in both equity and fixed income markets, we continue to maintain a bias toward high-quality companies with defensive profitability and shy away from areas more vulnerable to economic shocks, like high yield bonds. But most importantly with market volatility on the rise, we recommend sticking with a long-term perspective aligned with your financial goals and avoiding knee-jerk reactions. Selling in panic during a dip (or conversely, chasing hot rallies) can undermine long-term results. Periodic rebalancing and reviewing risk tolerance is wise, but wholesale portfolio shifts out of fear are usually not. In times like these, patience and prudent risk management are an investor’s allies. Please don’t hesitate to reach out to our team of advisors if you have questions or concerns or would like to review your financial plan.

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