APRIL 2025
Q1 Investment Commentary
Global Equity Markets Mixed While Bonds Rally in Q1
Financial markets began the year relatively strong, and investors were bullish following the Republican sweep of the November elections. As President Trump and his administration took office, investors were looking for direction. In a short period of time, the Trump administration quickly announced tariffs, immigration directives, government spending cuts and federal layoffs.
As the Trump administration started enacting its policies, investors appeared to rethink their bullishness. By mid-February, U.S. large caps reached their near-term peak and started to trend lower. To end the quarter, the S&P 500 and NASDAQ 100 Indices declined approximately 4% and 8%, respectively.1
Comparatively, international equity markets performed well in Q1. The MSCI ACWI ex USA Index, consisting of stocks of companies from developed and emerging countries, rallied approximately 5% in the quarter.1 Foreign equity markets were also supported by foreign currencies rallying against a declining U.S. dollar throughout the quarter. As U.S. risk assets declined, investors sought safety in high-quality bonds, with bonds rallying and interest rates declining. The 10-year U.S. Treasury Bond rallied roughly 4% in the quarter.1
Investors had been increasingly cautious throughout the quarter, waiting for President Trump to announce his administration’s tariff policy. On April 2nd, President Trump announced a new 10% baseline global tariff increase on goods imported to the U.S., with additional tariffs on select countries based on the administration’s calculations. Following the announcement, global equities sharply declined, safe-haven bonds rallied, and the U.S. dollar declined.
Shortly thereafter, on April 4th, China retaliated with its own 34% tariff increase on imported goods from the U.S. Following China’s announcement, global equities declined further and the VIX, a measure of volatility for the S&P 500 Index, jumped higher. Investors now need to wait to see if any other countries retaliate in a similar manner.
Source: TradingView.com. As of April 4, 20252
U.S. Fiscal Policy Uncertainty Driving Market Volatility
We stated in our Q4 investment commentary that government policies on tariffs, government spending, taxes and immigration could impact the economy, inflation, corporate earnings and financial markets. President Trump and his administration have been quickly working to implement their policies, but recent sentiment data and weakness in U.S. equity markets indicate elevated cautiousness.
Regardless of one’s political beliefs, businesses, consumers and investors prefer clarity to make decisions. Without clarity, businesses and consumers may hold back on spending and investors may prefer to reduce risk exposure. This is what we may be starting to see in the economy and financial markets this year.
Business, Consumer, and Investor Confidence Weakening
Earlier this year, there were signs of potential weakness in business and consumer sentiment as U.S. fiscal policy uncertainty increased. As U.S. equity market volatility increased, investor sentiment also started to show weakness.
Source: The Conference Board; NBER. Shaded areas represent periods of recession. As of March 25, 20253
According to the Conference Board’s Consumer Confidence Survey®, consumer confidence has been trending lower following the COVID-19 pandemic recovery in 2021. Short-term consumer sentiment does not necessarily translate into weaker economic data or corporate earnings, but the U.S. economy is heavily consumer driven and weaker sentiment can potentially lead to a slowing economy.
Investors have also appeared to be increasingly cautious. According to the recent American Association of Individual Investors (AAII) weekly sentiment survey, investors have become increasingly bearish on their views of the stock market over the next six months.
U.S. businesses and consumers have shown resiliency in uncertain times throughout history, but clarity and confidence are needed. Investors will need to determine whether the U.S. can remain resilient, or if this time is different. If the U.S. can remain resilient, longer-term investors may start considering taking advantage of opportunities during any shorter-term dislocations in the financial markets.
With President Trump’s tariff plan announced, and China’s quick retaliation, businesses, consumers and investors will need to see what happens next. It will take time to determine whether President Trump can successfully translate his administration’s policies to a stronger U.S. economy.
Source: American Association of Individual Investors. As of April 3, 20254
Economists and Equity Analysts Anticipate a Slowdown
With potential strain on businesses and consumers throughout the world due to trade uncertainty and higher prices from tariffs, economists appear to be reducing their economic growth estimates. Until U.S. fiscal policy is firmly established, economic uncertainty remains and forecasting the economy over the short-term may be difficult.
Regardless of one’s political beliefs, businesses, consumers and investors prefer clarity to make decisions.
Equity analysts and market strategists were generally bullish to start the year, but we are starting to see U.S. company earnings estimates coming down. We often see earnings estimates begin optimistically higher, then come down over time, so this is not a surprise, but the magnitude of reductions will be important. With President Trump’s tariff increases higher than what it appears many may have anticipated, corporate earnings estimates may continue to decline.
We have just entered the Q1 earnings reporting season. It will be important for investors to understand company management teams’ forward guidance as to how President Trump’s fiscal policies (tariffs, taxes, immigration, spending) may impact companies’ revenues, costs and profit margins.
Fed Rate Cuts on Pause for Now
Source: U.S. Bureau of Economic Analysis; FRED5
The U.S. Federal Reserve maintained the fed funds rate target range of 4.25-4.50% at both of its January and March meetings. The Fed has consistently stated that it will continue to monitor the economy, with its focus on maintaining price stability (moderate inflation) and full employment.
Thus far, inflation, as measured by the Personal Consumption Expenditures (PCE) Excluding Food and Energy Index, has remained between 2.5% and 3% over the last 12 months. At these sustained levels of annual inflation, the Fed does not appear to be eager to cut interest rates. We may need to see inflation get closer to 2% on a sustainable basis for the Fed to cut the fed funds rate further. Higher global tariffs may keep upward pressure on inflation over the near term and the Fed will need to navigate accordingly.
From an unemployment rate perspective, the economy remains well below the levels of strain we have experienced in the past. Although the U.S. government has enacted layoffs, we may need to see the private sector reduce its labor force to see the unemployment rate move much higher from here.
The potential implications of a shift in global tariff policy are a significant wildcard for the Fed to manage through. If the U.S. economy starts to show signs of weakness, the Fed may need to act and cut the fed funds rate to help support the economy.
Source: U.S. Bureau of Labor Statistics, FRED6
Q1 Market Review
Equity Markets
The U.S. equity markets were mixed in Q1, with growth companies’ stocks and other higher volatility stocks underperforming more defensive and higher dividend-paying stocks. Investors diversified across company types and sectors benefited relative to those that were aggressively positioned in U.S. growth and speculative stocks to start the year.
U.S. equities experienced a quick decline from their highs over the course of a few months. From their relative market peaks through April 4, 2025, after President Trump’s tariff announcement and China’s retaliation, the S&P 500 Index declined 17%, the NASDAQ 100 Index declined 21% and the more volatile Russell 2000 Small Cap Index declined 25%.1
The average calendar year decline of the S&P 500 Index over the last ten years has been 14%, with three periods of 20% declines or more. With a 17% decline for the S&P 500 from its peak, the current decline is deeper than average, but within the other three 20% drawdowns over the last decade. It is extremely difficult to accurately predict and position for a specific drawdown in any given year. At a minimum, investors should consider setting their expectations that an equity market drawdown of 10-15% in any given year is possible, and plan accordingly.
Source: Morningstar Direct. 2025 data as of April 4, 20251
With political uncertainty elevated and the potential impacts from changing global tariff policies unknown, U.S. equity investors will need to determine at what point valuations and longer-term opportunities become attractive enough to start positioning for equity markets to rally.
Foreign developed and emerging market equities performed well in Q1. The MSCI EAFE Index (foreign developed countries’ stocks) rallied approximately 7% and the MSCI Emerging Markets Index rallied roughly 3% in the quarter.1 Potential Chinese government economic support and increased nationalistic support in Europe may have helped drive equity outperformance relative to the U.S. in Q1. A decline in the U.S. dollar relative to foreign currencies was an added tailwind for international equities’ performance in the quarter. If global tariff and trade policy uncertainty results in a global economic slowdown, international equity markets may start to feel increased downside pressure.
Bond Markets
Bond markets rallied in Q1 as investors sought safety in bonds as the U.S. equity market declined. As bonds rallied, yields across the Treasury yield curve declined. The most interest rate-sensitive intermediate-term and longer-term bonds outperformed shorter-term bonds in the quarter.
Riskier, credit-sensitive bonds also performed relatively well in Q1. Higher yields in credit-sensitive bonds helped offset some downward price pressures as credit spreads widened a bit in the quarter.
Interest rates have been very volatile over the past few years as uncertainties around economic growth, inflation, U.S. debt levels and government policies persist. Intermediate- and longer-term interest rates have remained in a wide range, and we have yet to see materially higher or lower rates outside of that range.
Looking at the 10-Year U.S. Treasury yield over the last few years, it has remained between 3.5% and 5%. Following the rally in bonds, the yield is trading just below 4% as of April 4, 2025. Investors will need to determine if the yield can continue within that range or if significant changes in economic growth, inflation and U.S. debt levels drive the yield materially higher or lower than that range.
The Federal Reserve continues to reiterate it is data dependent and will be patiently monitoring economic data. New U.S. tariff policy and recent federal job cuts have the potential to impact inflation and the employment rate. The Fed will need to be patient to see if economic data worsens, and act accordingly.
Source: TradingView.com, April 4, 20257
The current fed funds rate target range is 4.25%-4.50%. According to the CME FedWatch Tool, financial markets are now pricing in the potential for a 100 basis points (1.00%) cut in the fed funds rate by the end of the year.8 It appears that financial markets may be pricing in a sharper economic slowdown, and that the Fed may need to be more aggressive in cutting interest rates. Fed funds futures have been very volatile the last few years. Investors will need to consider the potential of false signals from the fed funds futures market and focus close attention on the signals from the Federal Reserve directly.
Commodity Markets
Commodity markets broadly rallied in Q1, but drivers of performance appeared a bit mixed. Tariff uncertainty may have put upside pressure on economically-sensitive commodity prices driven by a rush to buy commodities before any potential tariffs were implemented. A declining U.S. dollar may have also provided some additional support for commodities in the quarter.
Gold prices rallied over 18% in Q1. This may have been partially driven by the declining U.S. dollar, a decline in U.S. equity markets and political uncertainty surrounding tariffs and their impact on future inflation. Industrial commodities also rallied in the quarter. The potential for government economic support in China and Europe may have added to bullishness in industrial commodities for the quarter.
Energy prices were higher in the quarter, driven by strength in natural gas contracts. WTI Crude Oil was slightly higher in the quarter and has remained volatile, driven by geopolitical concerns and supply/demand cross-currents. Economically-sensitive commodities could be heavily impacted by a global slowdown. If the global economy slows, recent commodity price gains may be short-lived.
Currency Markets
The U.S. dollar sharply declined in Q1 after a strong rally to end 2024. The U.S. dollar is often tied to the attractiveness of the level of interest rates and other U.S. assets relative to the rest of the world. As interest rates and U.S. equities declined in Q1, the U.S. dollar also declined.
Source: TradingView.com, April 4, 20259
Investors will need to determine whether the U.S. economy can resume the strength it has demonstrated compared to the rest of the world over the last few years. The resulting outcome may then drive the path of the U.S. dollar.
DYNAMIC PORTFOLIOS
The Dynamic models represent diversified, multi-asset portfolios that deviate from conventional ‘asset allocation’ methodology. The Dynamic strategy is optimized on a quarterly basis utilizing an ‘Expected Tail Loss’ methodology. This method isn’t solely focused on returns; rather, it seeks to achieve the most consistent, risk-adjusted performance within the investment universe available, characterized by its dynamic and adaptive approach. Utilizing advanced quantitative analysis and a risk overlay system, the Dynamic strategies aim to deliver consistent risk-adjusted returns tailored to investors’ unique risk tolerances and objectives.
Performance Review
The Dynamic models responded in line with their respective risk tolerances during the down market, with conservative models outperforming their higher-risk counterparts. Notably, the conservative allocations saw significant relative outperformance. This was driven in part by gold, which outperformed substantially and reached all-time highs during the quarter. Additionally, the long/short commodities strategy performed well in this environment due to its ability to play on both sides of the market, as well as its targeted allocation toward commodities. These exposures also contributed to reduced overall portfolio volatility. Sector exposures to U.S. equities were a drag on performance, aside from defensive sectors such as healthcare and consumer staples.
Positioning
The Dynamic portfolios underwent adjustments during Q1 to reflect varying risk levels. Conservative risk tolerances carried additional exposure to defensive sectors, as well as allocations to consumer discretionary and the broader S&P 500 index. Exposure to gold was also increased. Among risk assets, allocations were added to industrials, the broader S&P 500 index, utilities, and gold. Reductions included targeted mid-cap and small-cap exposures, along with a notable decrease in the technology sector.
Conservative allocations added exposure to short-term treasuries. In contrast, moderate risk portfolios swapped short-term treasuries for an aggregate bond fund.
FLEXTREND PORTFOLIOS
The FlexTrend portfolios are structured to attempt to participate in the upside of persistent positive trending U.S. equity and credit markets and to protect value in persistent negative trending markets. The portfolios can significantly reduce risk and raise cash and/or conservative fixed income exposure in large market drawdowns. The portfolios are partially allocated to non-trend, defensively-managed equity and fundamentally-oriented fixed income strategies to attempt to provide further diversification. The portfolios may underperform in trendless or choppy market environments.
Performance Review
The FlexTrend portfolios were mixed in Q1 as U.S. equities declined and bonds rallied. On the equity side, the portfolios’ allocations across hedged-equity strategies protected some value relative to core U.S. equity indices as would be anticipated throughout the equity market decline. The strongest contributor to performance in the quarter was our allocation to a valuation-sensitive tactical manager that had been underweight equities and overweight bonds, resulting in positive performance in Q1. Another strong contributor was a hedged-equity manager that primarily invests in lower volatility stocks, which generally outperformed higher volatility stocks in the quarter. Exposures to option-based hedged-equity and trend- following equity managers also protected some value in the quarter. Our FlexTrend Trading Signal remained bullish for the full quarter, which resulted in full exposure to U.S. large cap equities. If equity markets remain at lower price levels, the FlexTrend Trading Signal may indicate a change in trend and we may reduce exposure to equities at that time.
Across the fixed income allocation, our allocation to core bond managers was beneficial as interest rates declined and bond prices rallied. The strongest contributor to performance in the quarter was driven by one of our managers with the heaviest exposure to interest rate-sensitive bonds, as investment grade, interest rate-sensitive bonds generally outperformed in Q1.
Positioning
The FlexTrend portfolios remain allocated across core U.S. equities and tactical hedged-equity strategies. For our core U.S. equity allocation, we remain positioned in low-cost passive and higher-quality, growth-focused equity strategies. Across our tactical allocation, we remain positioned across option-based hedged-equity, trend-following and valuation-based strategies. We also continue to tactically trade a portion of the equity allocation based on intermediate-term price trends, a position that remains fully invested at this time.
In March, we adjusted our U.S. equity allocation in the FlexTrend portfolios. To further increase our diversification across our U.S. equity exposure, we sold out of our position in an enhanced U.S. equity index strategy and reallocated to a higher quality company large/mid cap growth strategy and a higher quality company dividend growth strategy. This reallocation also reduces the aggregate underlying expenses of the investments in the portfolios.
The FlexTrend portfolios remain allocated across actively-managed, fundamentally-driven bond strategies. We continue to prefer allocations across short- and intermediate-term bond managers to try to reduce the volatility driven by movements in interest rates.
FOCUSED INCOME PORTFOLIOS
The Focused Income portfolios primarily invest in higher income-generating assets. This can include dividend-paying stocks, option-income strategies, investment grade bonds, high yield bonds, emerging markets debt and real estate securities. The portfolios’ risk exposure is not tactically managed, which can result in poor performance in weak U.S. market environments.
Performance Review
The Focused Income portfolios rallied in Q1 as income-generating assets generally outperformed assets that rely on capital appreciation for returns. The strongest positive contributor in the quarter was our exposure to foreign dividend growth companies. International equity markets outperformed U.S. markets in Q1, and our dedicated exposure to international stocks benefited. Our exposures to a valuation-focused, option income strategy and closed-end funds were also solid contributors in the quarter. Exposures to a multi-asset income manager, our second option income manager, and a global real estate income manager also generated positive returns in the quarter. Detractors in Q1 were driven by exposure to U.S. large and mid-cap dividend-paying companies.
Across the fixed income allocation, the bond managers performed well as interest rates declined and bond prices rallied. Our structural underweight to duration was a slight headwind in Q1 as interest rate-sensitive bonds outperformed.
For our Focused Income – Ultra-Conservative portfolio, performance was solid as our allocation to active bond managers was beneficial as bonds rallied during the quarter. The portfolio’s structural lack of equity exposure also benefited as U.S. equity markets declined in Q1.
Positioning
The Focused Income portfolios remain positioned across higher income-generating assets. This exposure includes allocations to dividend-growth and higher dividend-paying companies, option income, tactical income, closed-end fund income and global real estate income strategies. We believe this diversified approach may help maintain higher income generation with additional opportunities for potential capital appreciation.
In January, we completed our position adjustments in our Focused Income portfolios to further align our positioning to our target allocations. These adjustments increased exposure to dividend-paying mid cap companies, dividend-growth companies outside of the U.S., and helped lower the overall expenses of the portfolios’ underlying investment positions. We believe these adjustments provide additional diversification across income-generating assets for the portfolios.
The Focused Income portfolios remain allocated to higher income-generating, credit-sensitive bond strategies. We prefer to allocate to core and tactical bond managers that have the flexibility to increase/decrease credit exposure as opportunities and risks arise. We continue to allocate across short-term and intermediate-term bond strategies to help diversify across interest rate exposures.
TOTAL RETURN/TOTAL RETURN ETF PORTFOLIOS
The Total Return and Total Return ETF portfolios provide long-term diversified exposure across U.S. and international equities, bonds and income-generating assets. The portfolios are structured to participate in the upside of bullish equity and credit markets and provide moderate income generation. The portfolios’ risk exposure is not tactically managed and can result in poor performance in weak market environments. The Total Return portfolios utilize mutual funds and ETFs to construct the portfolios, while the Total Return ETF portfolios only utilize ETFs to construct the portfolios.
Performance Review
The Total Return portfolios were mixed in Q1 as U.S. equities declined, international markets showed relative strength and bond markets rallied. The Total Return portfolios’ focus on diversification appeared to be beneficial in the quarter. The strongest contributors to performance were our dedicated exposures to international equity markets as international equities generally outperformed U.S. equities in the quarter. This included exposures to active core/value global equity, international developed large and small cap equity, and emerging markets equity managers. Our exposures to multi-asset income and closed-end funds also positively contributed in the quarter. Detractors in Q1 were primarily our exposures to U.S. equities and growth stocks, which underperformed.
In the Total Return taxable bond allocation, our allocation to active bond managers was a positive as interest rates declined and bond prices rallied. The bond managers with the heaviest duration exposure generally outperformed those that were underweight duration in the quarter. For the Total Return Muni bond allocations, our exposure to active bond managers was a positive overall in the quarter where positioning was a key driver for performance in a mixed muni market environment.
Positioning
The Total Return portfolios maintain diversified exposure across U.S. and international equities, with an additional allocation to higher income-generating assets. Across equities, we prefer to remain diversified across management style, market cap and geography. Within our income-generating assets, we also prefer exposure to multiple asset classes, including dividend-paying equities, credit-sensitive bonds, option income and closed-end funds. We continue to prefer a mix of passive index, fundamentally-driven, rules-based and actively-managed strategies to construct the Total Return portfolios.
The Total Return portfolios remain allocated to actively-managed bond strategies. We remain balanced across core, investment grade bond managers and more tactical bond managers that have the flexibility to allocate across the bond markets. We believe these bond managers have the depth and experience to successfully navigate the complex bond markets over time.
U.S. CORE/U.S. CORE ETF PORTFOLIOS
The U.S. Core and U.S. Core ETF portfolios provide long-term exposure to core U.S. equity and bond markets. The portfolios may have some exposure to non-core markets, including foreign assets and lower-quality fixed income. The portfolios are structured to participate in the upside of bullish U.S. equity and credit markets. The portfolios’ risk exposure is not tactically managed and can result in poor performance in weak U.S. market environments. The U.S. Core portfolios utilize mutual funds and ETFs to construct the portfolios, while the U.S. Core ETF portfolios only utilize ETFs to construct the portfolios.
Performance Review
The U.S. Core portfolios were mixed in Q1 as U.S. equities declined while bonds rallied. The U.S. Core equity allocations were weak across all positions in the quarter. Our exposure to a dividend growth manager held up better in the quarter as investors appeared to favor income-generating assets. Our exposures to growth stocks and mid/small cap stocks were the weakest performers in the quarter as more volatile areas of the market generally underperformed in Q1.
In the U.S. Core portfolios’ taxable bond allocation, our exposure to active bond managers positively contributed to the portfolios as interest rates declined and bonds rallied in the quarter. Managers with heavier allocations to interest rate-sensitive bonds generally outperformed in Q1. In the U.S. Core Muni portfolios muni bond allocation, performance was positive overall in Q1. Individual muni bond manager performance was a bit mixed, as duration and sector positioning were key factors in driving performance in the quarter.
Positioning
The U.S. Core portfolios remain allocated across the U.S. equity market through passive, fundamentally-driven, rules-based index and actively-managed strategies. We remain diversified across investment styles and market cap, with a preference for exposure to higher-quality, growing companies.
In January, we completed our position adjustments in the U.S. Core portfolios to further align our positioning to our target allocations. We believe the adjustments made last year and this year helped to increase exposure to higher quality companies across market cap, increase potential income opportunities and reduce the costs of the underlying positions in the portfolios.
The U.S. Core portfolios maintain diversified exposure to core, investment grade bond strategies alongside more tactical bond strategies. We continue to prefer exposure to core bond strategies that may act as a diversifier to equities should bonds rally when equities decline. We also continue to prefer exposure to tactical bond managers that can increase exposure to credit risk when risk assets decline and opportunities in credit-sensitive bonds become available.
Resources
1 Morningstar Direct. Performance provided as total returns. U.S. Mid Caps is defined by the Russell
Mid Cap TR USD index. U.S. Small Caps is defined by the Russell 2000 TR USD index. U.S. Growth is defined by the Russell 3000 Growth TR USD index. U.S. Value is defined by the Russell 3000 Value TR USD index. International Developed is defined by the MSCI EAFE NR USD index.
Emerging Markets is defined by the MSCI Emerging Markets NR USD index. U.S. Agg Bond is defined by the Bloomberg U.S. Aggregate Bond TR USD index. U.S. Investment Grade Corp is defined by the Bloomberg U.S. Corporate Investment Grade TR USD Index. U.S. High Yield is defined by the Bloomberg High Yield Corporate TR USD index. Broad Commodities is defined by the Bloomberg Commodity TR USD index. WTI Crude Oil is defined by the Bloomberg Sub WTI Crude Oil TR USD Index. Gold is defined by the Bloomberg Sub Gold TR USD Index. Industrial Metals is
defined by the Bloomberg Sub Industrial Metals TR USD Index. Short-Term Treasuries defined by the Bloomberg 1-3 Yr U.S. Treasury TR USD index. Intermediate-Term Treasuries defined by the Bloomberg Intermediate U.S. Treasury TR USD Index. Long-Term Treasuries defined by the
Bloomberg Long-Term U.S. Treasury TR USD Index.
2 TradingView. Volatility S&P 500 Index. Retrieved from https://www.tradingview.com/chart/S5oI8Odc/?symbol=TVC%3AVIX, April 4, 2025.
3 The Conference Board. U.S. Consumer Confidence Survey®. https://www.conference-board.org/topics/consumer-confidence. March 25, 2025.
4 American Association of Individual Investors. Sentiment Survey Historical Data. https://www.aaii.com/sentimentsurvey/sent_results. April 3, 2025
5 U.S. Bureau of Economic Analysis, Personal Consumption Expenditures Excluding Food and Energy (Chain-Type Price Index) [PCEPILFE], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/PCEPILFE, April 3, 2025.
6 U.S. Bureau of Labor Statistics, Unemployment Rate [UNRATE], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/UNRATE, April 3, 2025.
7 TradingVIew.com. U.S. 10-Year Treasury Yield. Retrieved from https://www.tradingview.com/chart/S5oI8Odc/?symbol=TVC%3AVIX. April 4, 2025.
8 CME FedWatch Tool. Retrieved from https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html. April 4, 2025.
9 TradingView.com. U.S. Dollar Index. Retrieved from https://www.tradingview.com/chart/S5oI8Odc/?symbol=TVC%3AVIX. April 4, 2025.