Key Observations
- U.S. Equity Selloff - The S&P 500 fell -5.6% in March and -4.3% for the quarter, its worst since 2022, with continued headwinds in early April.
- Mag Drag – Despite 61% of securities posting returns better than the index, AI concerns and a selloff in high-valuation stocks pulled down the market. Six of the "Magnificent 7" fell between -11% and -36% underperforming the S&P 500.
- Global Rotation to Stability - Investors shifted away from U.S. equities, favoring Europe and China. MSCI EAFE outperformed the S&P 500 by 11% for the quarter, its strongest lead since Q2 2022, while China gained 15% on stronger manufacturing data and renewed policy efforts.
- Growth Scare - The Federal Reserve is expected to hold rates, while fiscal policy tightens. Tepid consumer spending and declining confidence add to economic growth concerns.
Market Recap
Growing concerns over U.S. policy uncertainty, coupled with slowing economic momentum, triggered a selloff in U.S. equities. The S&P 500 declined -5.6% for the month of March and -4.3% for the quarter, marking its worst quarterly performance since 2022. Volatility remains elevated with Wall Street’s Fear Index, the VIX, hovering in the mid-20s and even reaching the mid-40s on April 7, up from the mid-10s throughout much of 20241. Policy out of Washington remains uncertain with on-again, off-again tariff news sounding the alarms on Wall Street since Trump took office on January 20. On “Liberation Day” last Wednesday, April 2nd, President Trump announced sweeping global tariffs to both friends and foes alike. The proposal from President Trump set a 10% universal tariff across the globe with higher rates for those countries with larger trade deficits. Some of the initially announced higher rates include EU (20%), China (54%), Japan (24%) and Vietnam (46%)2. Mexico and Canada are the relative “winners” here with no additional increase from the originally stated 25% rate from a few weeks ago (and could see that number decrease if immigration and fentanyl targets are met).
The tariff announcement triggered a global market selloff with few places to hide. This selloff contributed to an already difficult start to the year especially within U.S. growth stocks. Looking back at the first few months of the year, 61% of securities outperformed the headline index return, but the weight of the “Magnificent 7” proved too great. Profit-taking in these high-valuation positions, alongside AI-related concerns—such as Alibaba’s co-founder warning of excess data center capacity and reports of Microsoft pausing projects in the U.S. and Europe—weighed on sentiment. All Magnificent 7 constituents, with the exception of Meta, posted declines greater than the index, with shares down between -11% and -36% for the quarter3. This rotation reflects a broader investor repositioning, both by sector and geography, as market participants sought shelter from volatility. Throughout the first quarter, we share a rotation not seen over the past two years4:
Style: Large-cap value outperformed large-cap growth by over 11%.
Capitalization: Large-cap core outperformed small-cap core by over 4%.
Sectors: Defensive positioning is clear, with consumer staples outperforming consumer discretionary by 17%.
Geography: A notable exception to this risk-averse trend is the U.S. versus international markets. The S&P 500 trailed the MSCI EAFE by 11% and the MSCI Emerging Markets index by 7%.
On the economic front, the Fed is expected to keep rates steady – at least in the short-term – amidst rising policy uncertainty and inflation hovering slightly above target. Inflation remains above the intended target of 2.0% and the most recent jobs data published on April 4th showed unemployment tick slightly higher from 4.1% in February to 4.2% in March. Additionally, consumer spending remains tepid (-0.6% m/m in January and 0.1% m/m in February5) and confidence throughout the quarter is dwindling with the risk of an economic slowdown rising. In response, interest rates declined over the quarter, supporting positive fixed income returns, though performance was flat for the month. Credit markets, while initially muted despite growth concerns, began to react, with high-yield spreads widening from ~260 lows in January to ~350 by the end of March3. As a result, credit underperformed for the month.
Staying the Course
As markets and client portfolios have felt the market decline throughout the first quarter and into early April, our message remains clear: staying invested– and diversified – while doing your best to ignore all of the headline noise is your greatest opportunity for success. Emotionally, market lows are felt more dramatically than when markets move higher, which can lead to ill-advised decision making. Often, the best – and worst – days within the equity markets occur in close succession. This can make market timing extremely difficult. As shown on the chart6, selling out during periods of high volatility or even staying on the sidelines without a concrete investment plan can dramatically lead to missed opportunities in the market. Focus should remain on investing for the long-term with high quality holdings and a well-diversified portfolio.
Outlook
Despite the seemingly rapid rate of change, our focus for building high quality portfolios with a long-term investment approach has not changed. A fragile market—characterized by high valuations, high concentration and the persistent risk of rising inflation—tilt the odds toward heightened volatility. Additionally, with the increasing likelihood of simultaneously restrictive monetary and fiscal policy, coupled with tepid consumer spending, the probability of an economic slowdown has risen. How will the Fed react? Time will tell.
That said, it is important to remember that market volatility and economic slowdowns are a natural part of investing. For example, as of March 31, the S&P 500 had declined 9.2% from its peak—a move that may feel unsettling but is well within historical norms. Since 1990, the average intra-year drawdown is 9.7%7—nearly identical.
While periods like this may seem atypical in the moment, history suggests that staying focused on the long term remains the most profitable approach. Markets have a way of transferring wealth from those who react impatiently to those who maintain discipline and perspective.
Sources
1 FactSet as of March 31, 2025
2 Strategas Research Partners
3 FactSet as of March 31, 2025
4 J.P. Morgan Asset Management
5 Bureau of Economic Analysis Real Consumer Spending as of March 31, 2025
6 J.P. Morgan Asset Management – Guide to Retirement 2025
7 Morningstar as of December 31, 2024
Disclosures
The information provided is illustrative and for educational and informational purposes only and does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your attorney or tax advisor.
The views expressed in this commentary are subject to change based on market and other conditions. This document may contain certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. Certain targets within the presentation are estimates based on certain assumptions and analysis made by the advisor. There is no guarantee that the estimates will be achieved.
All information has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. There is no representation or warranty as to the current accuracy, reliability or completeness of, nor liability for, decisions based on such information and it should not be relied on as such.
No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. All investments include a risk of loss that clients should be prepared to bear. The principal risks of Clarendon Private’s strategies are disclosed in the publicly available Form ADV Part 2A.
Diversification does not ensure a profit or guarantee against loss. Asset Allocation may be used in an effort to manage risk and enhance returns. It does not, however, guarantee a profit or protect against loss. Index returns are unmanaged and do not reflect the deduction of any fees or expenses.
Comparisons to any indices referenced herein are for illustrative purposes only and are not meant to imply that actual returns or volatility will be similar to the indices. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income. You cannot invest directly in an Index.
The S&P 500 is a capitalization-weighted index designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
MSCI EAFE is an equity index which captures large and mid-cap representation across Developed Markets countries around the world, excluding the US and Canada. The index covers approximately 85% of the free float-adjusted market capitalization in each country.
CBOE Volatility (VIX) is a calculation designed to produce a measure of constant, 30-day expected volatility of the U.S. stock market, derived from real-time, mid-quote prices of S&P 500 Index call and put options.
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