Q1 2025 Commentary and Investment Outlook
- SWSCM
- Apr 28
- 4 min read
The first quarter of 2025 had been a period of volatility for the financial markets and a period of re-calibration for the economy. Fueled by a mix of policy uncertainty and shifting monetary expectations, the economic landscape now reflects an abundance of unknown variables of growth, inflation pressures, and evolving central bank strategies, with financial markets responding to these dynamics in varied ways. All of these variables are in play in every quarter for the economy, however a new administration can exacerbate the variables of policy uncertainty, and the new administration has taken these variables, and made it even more unpredictable by adopting tariffs as a way to open up protectionist foreign markets for U.S. companies.
The reciprocal tariff policy has created confusion and may have lowered individual expectations for the economy. As noted in our monthly commentary, the chart below incorporates the Federal Reserve’s new projections from March for real GDP, for 2025 and 2026.
The Fed has lowered its GDP forecast for 2025 and 2026 below 2% in its latest “Summary of Economic Projections”.
Source: Bureau of Economic Analysis, Federal Reserve Board – Economic Projections – 3/19/2025
However, hard economic data remained robust for the quarter. The U.S. economy in Q1 2025 demonstrated resilience, with real GDP growth estimated at 2.4% annualized, below Q4 2024’s 3.1%, but above consensus expectations of a slowdown.[i]
Core CPI inflation remained above 3%[ii], as the service sector continued to exhibit pricing pressures due to demand-driven issues. The labor market has remained resolute, as the unemployment rate for March was 4.2%, which is considered full employment. [iii]
The fixed income markets navigated the volatile quarter as investors also grappled with the above-mentioned variables. Yields fluctuated throughout the quarter, reflecting uncertainty over the Federal Reserve’s policy and the amount and timing of future adjustments of the federal funds target rate. U.S. Treasuries were relatively range-bound, until the final few days of the quarter, when yields began to fall as the markets digested the new policy of reciprocal tariffs introduced a month prior, but lacking real details until implementation in the beginning of April. Yields on U.S. Treasuries dropped as investors bought Treasuries as a safe haven in reaction to falling equity markets.
Corporate bond markets delivered steady performance for the quarter, buoyed by solid fundamentals and investor appetite for yield. Investment grade spreads rose for the quarter, also following the announcement of tariffs. The option adjusted spread (OAS) for the U.S. Corporate Investment Grade Index rose by 16% for the quarter.[iv] On March 31, 2025, OAS was 0.93 for the index. Uncertainty regarding corporate profits, and in turn corporate balance sheets due to reciprocal tariffs, will continue to put upward pressure on spreads for corporate bonds. The general effects of this spread widening were mitigated due to overall falling U.S. Treasury yields.
The quarter underscored a transition from monetary policy dominance to fiscal and geopolitical drivers. U.S. trade policy will continue to inject volatility into global financial markets. At this point, the actual economic impact remains unknown. Traditional fixed income strategies with higher starting yields (e.g. U.S. 10-Year Treasury yield 4.21%, Bloomberg U.S. Aggregate at 4.6%) provided a buffer against rate volatility, making it an appealing diversifier to riskier asset classes.
Looking ahead, fixed income investors may find opportunities in short-to-intermediate duration and higher investment grade focused strategies. The Fed’s next set of moves this year will likely be rate cuts towards the latter half of 2025. For now, fixed income remains a stabilizing force in portfolios as volatility increases.
SWS Capital Management’s (SWSCM) philosophy is based on a value-oriented, active management style which emphasizes liquidity and risk management. This philosophy is woven into all our strategies. Security selection, sector allocation, and yield curve positioning are based upon our interest rate forecast as well as our fundamental economic outlook.
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[i] Economists average forecast as of 03/31/2025 - Bloomberg
[ii] US CPI Urban Consumers Less Food & Energy Mom - February 2025 – Bureau of Labor Statistics
[iii] U-3 Unemployment Rate Total Labor Force Seasonally Adjusted – March 2025 - Bureau of Labor Statistics
[iv] U.S. Corporate Investment Grade Index – Bloomberg 3/31/2025
Source: Bloomberg and ICE Date Services as of 03/31/2025
Disclosure
The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision. All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed. Past performance is no guarantee of future results, and the opinions presented cannot be viewed as an indicator of future performance. Investing involves risk including loss of principal. Forecasts contained herein are for illustrative purposes only, may be based upon proprietary research and are developed through analysis of historical public data.
