Markets shifted tone, and investors grew more anxious of the current economic environment as foreign trade policy took hold with the Trump administration’s announcement of a 10% universal tariff and additional tariffs on various countries. The Fed’s economic projections have softened from its pre-election views in 2024, as the board of governors digests sticky inflation and increasing uncertainty in the labor market. International equities outpaced domestic by a substantial margin during the quarter as fragile markets began to crack and elevated valuations and heavy index concentration laid the groundwork for heightened market volatility.

Interest rates were volatile during the month as markets digested growing concerns about the economic backdrop and the outlook for inflation. U.S. equity markets declined in March, and U.S. equity REITs declined as the broader equity market sold off.

Weaker economic data, a patient Fed and shifting policy dynamics fueled slowdown fears triggering a broad selloff of U.S. equities, with defensive sectors outperforming. High-valuation stocks fell more than peers, while value and defensive sectors led, and EAFE took another step forward and added to its 2025 lead over the S&P 500, led by EU financial and defense spending along with a cooling of U.S. high valuation stocks.

Rates generally moved lower in the month, a boon for fixed income assets, growing concerns about the macro economic backdrop sent domestic equities lower in February, and despite the broader equity market sell-off, equity REITs posted a positive return, benefiting from the declining interest rate environment.

President Trump’s executive orders kept investors on edge, but his position on tariffs provided a tailwind for international markets. A 17% drop in NVIDIA shares, triggered by AI competition from China, highlights the risks of market concentration and stocks priced for perfection, and with solid GDP growth and low unemployment, the Fed left rates unchanged, signaling caution rather than a rush to ease policy.

Fixed income markets had a positive month. U.S. equity markets had a positive return in January and REITs were mostly positive in the month.

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Markets shifted tone, and investors grew more anxious of the current economic environment as foreign trade policy took hold with the Trump administration’s announcement of a 10% universal tariff and additional tariffs on various countries. The Fed’s economic projections have softened from its pre-election views in 2024, as the board of governors digests sticky inflation and increasing uncertainty in the labor market. International equities outpaced domestic by a substantial margin during the quarter as fragile markets began to crack and elevated valuations and heavy index concentration laid the groundwork for heightened market volatility.

The Federal Reserve cut its policy rate by another 0.25% in December. Equity markets took a step back in December, and REITs fell in December, negatively impacted by the jump in longer dated interest rates.

A republican victory fueled a rally in the U.S. equity markets in anticipation of pro-business policies such as potential deregulation and tax cuts. The U.S. dollar appreciated, reflecting expectations of inflationary fiscal policies and potential shifts in Federal Reserve actions, and the Federal Reserve and Bank of England cut rates by 25 basis points, citing a need to support economic growth amid moderating inflation.

The Federal Reserve cut its policy rate by another 0.25% in November. U.S. equity markets rallied as investors received some clarity following the presidential election, and REITs ended the month higher, benefiting from the equity market tailwind and a slight decline in interest rates.

Interest rates spiked during the month, a sharp reversal from the third quarter. Equity markets declined across regions, with U.S. large cap outperforming, and a negative month for REITs was primarily driven by the rising interest rate environment, as well as the broader beta to the equity market. 

The Federal Reserve has embarked on the latest cutting cycle, with an initial cut of 50 basis points at its September meeting. Financial markets, on average, have performed well following the onset of an interest rate cutting cycle, and market volatility will likely remain elevated as we head into the presidential election.

The Federal Reserve cut rates by 50 basis points during the month, leading to a rally in bond prices as investors anticipated lower future interest rates. U.S. stocks rose due to investor optimism surrounding future rate cuts, improving economic data, and strong quarterly performance, and REITs had a favorable month.

Inflation improvement and weaker economic data shift Fed sentiment

The Federal Reserve acknowledged a cooling labor market and softening inflation at its Jackson Hole summit, indicating its willingness to shift policy. Domestic equity market performance was mixed with large cap positive and small cap negative, and REITs had a positive month as interest rates declined.

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Softening inflation and signs of the labor market slowing sent interest rates lower during the month. Market leadership shifted during the month as all eyes remain on the Fed and the possibility of a September rate cut, and REITs had a favorable month.

The U.S. Core Consumer Price Index fell throughout the quarter from 3.8 to 3.3 percent, the lowest since April 2021. Investors complacent in cash may miss potential total return opportunities in core fixed income, and concentration in U.S. large cap markets continues to support returns, with nearly half of the S&P 500 Index constituents underperforming during the quarter and generating negative average returns.