MARKET UPDATE
Equity markets experienced heightened volatility in April due to a confluence of macroeconomic and geopolitical factors. Escalating trade tensions between the U.S. and China, including massive reciprocal tariff announcements, weighed heavily on market sentiment, particularly in manufacturing, technology, and consumer sectors. Additionally, investors reacted to renewed uncertainty over Federal Reserve policy, as hotter-than-expected inflation data prompted concerns that rate cuts could be delayed or reduced. Although early, earnings season has delivered mixed results thus far, with several high-profile companies issuing cautious guidance amid rising input costs and weakening global demand. Meanwhile, diverging signals in labor market data and consumer spending has raised questions about the resilience of the U.S. economy. Altogether, these dynamics fueled sharp swings in investor positioning and sector rotation throughout the month.
For the most part, bonds provided a nice ballast against equity market volatility. However, the fixed income market faced pressure as the Trump Administration’s tariff policies and persistent inflation data led to a sharp repricing of Federal Reserve rate expectations. Treasury yields rose across the curve, with the 10-year yield nearing multi-month highs amid reduced hopes for near-term rate cuts. Credit spreads widened slightly, particularly in lower-rated corporate bonds, as investors grew more risk-averse in response to macroeconomic uncertainty. Municipal and mortgage-backed securities also saw modest outflows, reflecting broader concerns about interest rate volatility and liquidity.
The overall economy presents a mixed picture. On the positive side, the labor market remains relatively strong, with the unemployment rate at 4.2% and 228,000 jobs added in March, surpassing expectations. Retail sales also showed resilience, rising 1.4% and up 4.6% year-over-year.
However, there are concerning signs. The economy contracted by 0.3% in the first quarter, marking the first decline in three years, largely due to a surge in imports ahead of new tariffs, which subtracted up to 5% from GDP growth. Consumer confidence has also plummeted to a nearly five-year low, reflecting growing concerns over tariffs and economic uncertainty. Inflation remains above the Federal Reserve's target, with the PCE price index at 3.6%, complicating potential rate cuts.
In summary, while employment and consumer spending show strength, the contraction in GDP, declining consumer confidence, and persistent inflation highlight underlying vulnerabilities in the economy that we will continue to monitor closely.
ADVISORS’ PERSPECTIVE
The U.S. economy showed signs of strain in the first quarter of 2025, with real GDP contracting by 0.3%—the first decline in three years. A significant driver of the downturn was a surge in imports, up over 40%, as businesses accelerated purchases ahead of sweeping new tariffs. These tariffs, introduced under the Trump administration’s “Liberation Day” policy, imposed a blanket 10% rate on imports from 90 countries, with even steeper rates on Chinese goods. The resulting spike in imports widened the trade deficit sharply, weighing heavily on GDP.
The global response to these trade measures has been volatile. Businesses and investors are facing increased uncertainty, and some are pausing investment plans until the policy environment stabilizes. Adding to the uncertainty is the U.S. dollar’s continued decline. Down roughly 10% since January, the dollar has weakened amid trade tensions and a reduction in foreign investment in U.S. assets. This depreciation has complicated matters for import-heavy industries and raises concerns about long-term inflationary pressures.
On the corporate front, Q1 earnings have been mixed. While certain sectors like energy and healthcare have shown relative resilience, many multinational companies are already reporting margin pressure from rising input costs and currency fluctuations. Consumer spending and capital investment did offer some support to the economy, but these appear to have been front-loaded in anticipation of the new tariffs.
Labor market trends remain a mixed bag. While unemployment remains low, job growth has slowed across manufacturing and logistics, sectors most directly affected by trade disruptions. Some companies have announced hiring freezes or cost-cutting plans as they wait to see how the policy landscape evolves. At the same time, inflation remains a key concern, particularly if tariffs and a weaker dollar continue to push prices higher. The services sector, which has largely held steady throughout previous slowdowns, is beginning to show early signs of softening demand as consumer confidence wavers.
Central banks globally are monitoring the situation closely. While the Federal Reserve has held off on rate cuts so far in 2025, continued signs of economic weakness may prompt a shift in monetary policy as soon as this summer. Investors are watching closely for any dovish signals, especially with equity markets showing increased volatility in response to geopolitical headlines. With uncertainty mounting on multiple fronts—trade, currency, corporate earnings, and monetary policy—the path forward for the U.S. economy looks increasingly complex.
We remain cautiously optimistic and continue to use a quantitative investing approach. In times of uncertainty, it is more important than ever to follow the data and not make decisions based on emotions. Hilltop’s partnership with Helios relies on facts and data, which we use during our recalculations on a bi-weekly basis. Our models adjust appropriately to market conditions.
DISCLOSURE
This update is not intended to be relied upon as forecast, research, or investment advice, and is not a recommendation, offer, or solicitation to buy or sell any securities or to adopt any investment opinions expressed are as of the date noted and may change as subsequent conditions vary. The information and opinions contained in this letter are derived from proprietary and nonproprietary sources deemed by Hilltop Wealth & Tax Solutions to be reliable. The letter may contain “forward-looking” information that is not purely historical in nature. Such information may include, among other things, projections and forecasts. There is no guarantee that any forecast made will materialize. Additional information about Hilltop Wealth Solutions is available in its current disclosure documents, Form ADV, Form ADV Part 2A Brochure, and Client Relationship Summary Report, which are accessible online via the SEC’s Investment Adviser Public Disclosure (IAPD) database at www.adviserinfo.sec.gov, using SEC # 801-115255. Hilltop Wealth Solutions is neither an attorney nor an accountant, and no portion of this content should be interpreted as legal, accounting, or tax advice.