Bond Yields Fall With Rush To Bonds – Fixed Income Overview

It was the first time since the onset of the pandemic in March 2020 that bonds rose and stocks fell in a three-month period. Investors tend to buy bonds when they believe growth is going to slow and eventually force the Federal Reserve to ease monetary policy The growing fear of a looming recession is pushing yields lower as bond prices edge higher. Inflation has now become much less of a worry. The 2-year Treasury bond yield reached its lowest level since 2022, as government and corporate bonds were sought after as safe havens as turmoil affected markets. The yield on the 10-year Treasury bond ended the 1st quarter at 4.23%, down from 4.79% in January.

Sources: Treasury Dept, Federal Reserve

Volatility Soars As Tariffs Are Announced – Global Equity Overview

The announcement of the tariffs along with growing concerns of weakening consumer demand led equity indices lower in early April. Souring consumer sentiment in March and stubborn inflation worries were already pressing before the tariff turmoil, which only added to the turbulence. Global equity indices shed gains that had accumulated earlier in the quarter. Broad pullbacks across Europe and Asia led global markets lower as the fear that tariffs would disrupt sensitive supply chains and curtail trade. The S&P 500 Index revealed that the energy sector and utilities saw the most stability of all sectors in the first quarter. The Volatility Index, also known as the VIX, rose significantly as the tariff announcements were made. Extreme volatility and large volume trading sent equity indices broadly lower, affecting nearly every publicly traded company on the exchanges. Such volatility is perceived by traders and some investors as an opportunity to buy quality companies at discounted valuations.

Sources: S&P, Dow Jones, Bloomberg

Change in Consumer Sentiment & Behavioral Spending Patterns Is Inevitable

Since consumer expenditures represent nearly 70% of Gross Domestic Product (GDP), any behavioral change in consumer expenditures may result in a retraction of economic growth. For decades, the valuations of stock and home prices have directly affected how freely consumers spend. Historically, as stock and home values have risen, so has consumer sentiment and the propensity to spend. Since higher income consumers hold more stocks and have larger home valuations than lower income consumers, any changes in stock or home values determines changes in spending behaviors. Analysts, economists and the Federal Reserve are closely following retail sales and spending patterns of the top 10% earners of consumers, which represent roughly 50% of all consumer expenditures. Historically, any sudden increase or decrease in stock valuations can alter the spending behavior of wealthy consumers. Data from prior market swings has shown that a 10% rise in stock prices equates to a 1% rise in consumer expenditures by the wealthy, while a drop in stock valuations poses the same dynamic but with a contraction in expenditures.

Sources: Federal Reserve, Bureau of Labor Statistics

Drop in Commodity & Oil Prices Could Spur Lower Prices For U.S. Consumers

As market turmoil spread to all sectors of the economy, commodity prices including oil, have fallen as the fear of a global slowdown has escalated. Falling commodity and oil prices can be beneficial for U.S. consumers, whereas the costs of U.S. sourced materials for building homes could reduce the price of home construction, and the cost of domestically drilled and refined oil could reduce gasoline prices at the pump. Since tariffs affect imported goods and products, domestic goods and products won’t be imposed with such tariffs and will fare better than their imported counterparts.

Sources: Federal Reserve Bank of St. Louis, U.S. Commerce Dept.

Infrastructure Build Out & Manufacturing Remain Intact – Domestic Economic Expansion

The most recent data released by the U.S. Department of Commerce revealed that construction spending, like most of the incoming data of late, is slowing. Areas of weakness included multi-family, home improvement, manufacturing, and commercial real estate. There were some encouraging signs of strength across sectors geared towards infrastructure improvements. Aging U.S. highways and an antiquated electrical grid, have prompted billions of dollars to be allocated for improvement and modernization. The increasing demand for electricity brought about by the rapidly expanding A.I. industry, has revitalized the need for utility companies to expand and build new facilities nationwide. Deregulation in the energy and utility sectors is expected to expedite the improvement and building process substantially. In 2020, Covid upended global supply chains and increased costs for manufacturers in the U.S. and abroad. Many of the derailed supply chains have still not been completely resolved.

Sources: U.S. Department of Commerce