Weekly Market Insights 03.10.25

A World Turned Upside Down

Financial Markets

U.S. financial markets declined last week, reversing gains for the S&P 500 since the beginning of the year. With two consecutive years of 20%+ returns, investor enthusiasm is subject to corrections. As we and many others have reiterated, markets dislike uncertainty, and at present, uncertainty reigns supreme. While there are no obvious signs of distress in economic fundamentals, growing political unpredictability weighs on investor sentiment.

Much of the recent weakness was driven by declines in the Information Technology and Consumer Discretionary sectors. Notably, recession risk indicators in the corporate bond market increased slightly as corporate bond yield credit spreads for high-yield (below BBB-rated) bonds widened from the recent 2.62% low to 2.97%. For context, this credit/recession risk measure stood at 3.27% one year ago and, during the COVID recession, peaked at 10.87%.

Economics

At the beginning of 2025, the U.S. was the world’s strongest and fastest-growing developed economy. Its stock market, often viewed as a barometer of economic health, was headed to new highs, inflation was moderating, and short-term interest rates were gradually declining.

Fast-forward to March 10th, and the landscape has changed. Job creation is slowing, tariffs are becoming more prevalent, government and private sector layoffs are increasing, investment activity is slowing, and the U.S. dollar has weakened by 4.1%. Through the end of last week, the S&P 500 was down 1.7% since January 1st and 6% from the all-time high reached on February 19th.

What changed? The shift from relative complacency to broad-based risk aversion appears to stem from concerns over political interference in the economy.

Two key issues are driving this uncertainty:

1. Tariffs – The widespread use of tariffs is a major concern. It is difficult to find an economist who does not view tariffs as inflationary and detrimental to economic growth.
2. Policy Uncertainty—The unpredictable nature of tariff threats and the potential labor shortages in specific industries created by immigration policy changes are eroding confidence in the administration’s economic approach.

While the economy remains relatively stable, extreme uncertainty will eventually take its toll.

China is also grappling with economic challenges. Beyond its well-documented financial sector problems, domestic growth has slowed, and job creation remains weak. The country faces significant structural hurdles that will require substantial policy changes to overcome. The United States’ tariff and political policy will impact China’s ability to navigate its difficulties.

Conclusion

This is a particularly challenging environment to analyze, as economic and political factors are at play. The economic risks posed by tariffs are well understood, but the administration’s erratic approach to policy implementation creates uncertainty and additional complications.

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