Key Takeaways
Tariff tensions bring renewed market volatility.
U.S. stocks declined, while international markets gained on a weaker dollar.
Crypto cooled despite supportive policy signals from Washington.
The Fed remains on hold as it awaits clearer economic signals.
Michigan’s manufacturing-driven economy is feeling the strain of rising tariffs.
Market review
Early optimism surrounding the new administration quickly gave way to anxiety as tariff threats rattled markets and sent volatility surging. While the first three months saw a steady increase in market choppiness, the really big moves began in April, the day after Liberation Day, when President Trump announced reciprocal tariffs. While the stated goal is to bolster domestic industries and reduce the trade deficit, many analysts view the high tariffs as a negotiating tactic—part of a broader strategy aimed at pressuring mainly China into new trade concessions. That focus has raised the stakes, as markets try to gauge whether this is the start of a full-blown trade war or a high-stakes bargaining maneuver. Either way, the uncertainty is already affecting sentiment and pricing across sectors tied to global supply chains.
Consumer Inflation Expectations [Source: https://www.kitces.com/blog/strategies-trump-tariff-conversations-client-communication-financial-advisor-economic-volatile-market/]
The figures labeled as tariffs in the chart actually reflect the U.S. trade deficit with each country—not official tariff rates. This was later clarified by the U.S. Trade Representative. The data highlights the trade imbalances the administration seeks to address.
After S&P 500 reached an all-time high on February 19th, the market dropped 10% before a partial recovery later in March. U.S. equities declined -4.7%[1] in Q1, marking the worst quarterly performance since 2022. In contrast, international markets advanced 6.2%[2], supported also by a weakening dollar. Emerging markets also posted a solid gain of 2.9%[3], providing valuable diversification benefits. While we are still in the early stages of this tariff cycle, investor attention is shifting toward corporate earnings guidance. Some companies may face profit margin compression, while others—particularly those poised to benefit from reshoring and a more business-friendly policy environment—could see some upside.
Market Performance [Source: Quarterly Market Review – First Quarter 2025 by Dimensional Fund Advisors] [4]
Commodities led all asset classes with an 8.9% return in Q1 and also in the one-year performance rankings with a 12.3% gain[5]. Within commodities, natural gas surged an impressive 30%, while gold climbed steadily with a 17% return, reinforcing its role as a potential safe-haven asset during periods of uncertainty.
Crypto, on the other hand, tumbled as early optimism around a pro-crypto administration faded amid rising economic concerns. As the worst-performing asset class in Q1 with a -17% return[6], it gave back most of its gains since the November 2024 election. Despite meaningful policy actions—such as disbanding the DOJ’s crypto enforcement unit, appointing a pro-crypto SEC chair, and repealing burdensome IRS rules for DeFi—the sector struggled under broader macroeconomic pressures.
Bonds provided a measure of stability throughout Q1, acting as a cushion for balanced portfolios amid equity market turbulence. Short-term Treasury Inflation-Protected Securities (TIPS) outperformed relative to historical norms[7], with the iShares 0–5 Year TIPS Bond ETF (STIP) returning impressive 3% for the quarter[8]. However, April brought renewed pressure: a sudden selloff pushed 10-year Treasury yields up by 0.5% to 4.5% in just one week. Yields have since stabilized around 4.3%, but this remains a key metric to monitor for the market participants as for the government.
Yield on 10 Year Treasury [Source: https://www.cnbc.com/quotes/US10Y]
Large value stocks with 2.1% return outpaced growth at -11.1%, while large caps (both value and growth) continued to outperform with -4.5% the small caps at -9.5% in Q1[9]. This performance gap reflects how tariff pressures and inflationary signals are favoring scale and balance sheet strength. Beneath the surface, however, small-cap and value stocks are gaining attention due to their domestic focus and alignment with protectionist policies. While small caps have lagged, their U.S.-dominant revenues and lower exposure to global supply chains could offer relative resilience if tariffs persist. A balanced allocation that blends resilient large-cap with selectively positioned small- and mid-cap value may help investors navigate this evolving backdrop.
Finally, the AI-fueled stock boom hit a reality check in early 2025. After driving much of the market’s momentum through 2023 and 2024, AI-exposed megacaps like Nvidia and Microsoft experienced sharp corrections by April—some falling 20–40% from recent 2024 highs. While enthusiasm for AI’s long-term potential remains warranted, some valuations may have gotten ahead of fundamentals. That said, the broader theme—and its potential to boost productivity across industries—remains compelling. For long-term investors, a diversified and fundamentals-driven approach to AI exposure continues to be the prudent path.
Economy
With recent market turbulence, concerns about the U.S. economy have returned to the forefront. Looking back at the first quarter, GDP growth is expected to stall, with projections ranging from -2.2%[10] to +0.3%[11]. While the final number will matter, markets are already focused on what Q2 and the rest of 2025 might bring, and how the Federal Reserve will respond.
Although the Fed’s mandate isn’t to manage the stock market, it does monitor financial conditions, especially in treasuries, to ensure the system remains stable. Inflation has declined to 2.4%[12] in March, the lowest since September 2024, and unemployment held steady at a healthy 4.2%[13] in March. However, the inflationary and labor market implications of tariffs are complicating the Fed’s next steps, as evidenced by the rise in consumer inflation expectations shown in the chart below. For now, officials are waiting for more data before making any policy changes. In the meantime, markets are increasingly pricing in more rate cuts, with rate expectations by year-end at 3.25%-3.5%[14] a whole 1% lower from the current 4.25%-4.5%.
Consumer Inflation Expectations [Source: https://www.kitces.com/blog/strategies-trump-tariff-conversations-client-communication-financial-advisor-economic-volatile-market/]
A major pillar of the new administration’s economic strategy is reducing the federal deficit. Central to that effort is the high-profile launch of the Department of Government Efficiency, which aims to cut waste, streamline operations, and modernize public spending. On the other side of the ledger, the administration is pursuing tax cuts designed to stimulate consumer demand and business investment. That combination—lower revenue and leaner spending—has sparked debate over long-term fiscal implications. To return the government debt to a sustainable trajectory, Treasury Secretary Bessent has outlined a “3-3-3” plan: bring the federal deficit down to 3% of GDP (from 6.4% in 2024), grow the economy by 3%, and increase U.S. oil production by 3 million barrels per day. It’s an ambitious roadmap—and its success will be closely watched throughout the years.
Federal Deficit and Surpluses (dashed line represents the average) as percentage of gross Domestic Product [Source: Congressional Budget Office]
With its heavy exposure to manufacturing, Michigan is already feeling the impact of the new tariffs. In West Michigan, companies like Steelcase and MillerKnoll face rising input costs, particularly on imported metals and components, costing them millions of dollars[15]. Across the state, automakers are also contending with higher raw material costs and the potential for auto part tariffs—developments that could disrupt tightly integrated North American supply chains. While these challenges are real, many local firms are drawing on experience from prior tariff rounds and Covid to adapt, and some are exploring new supply strategies that could ultimately boost domestic resilience. For Michigan, the road ahead may be uneven, but it also presents an opportunity to evolve toward a more self-sufficient industrial economy.
Social Security and Medicaid remain at the heart of ongoing budget discussions, with sustainability concerns drawing renewed attention in early 2025. Social Security benefits rose by 2.5%[16] this year due to a cost-of-living adjustment (COLA), offering relief to recipients but adding to the program’s long-term financial burden. At the same time, proposals to reduce federal Medicaid spending—such as work requirements or funding caps—are under debate in Washington. In Michigan, where one in four residents relies on Medicaid and Social Security plays a key role in retirement security, these debates carry real stakes. No immediate changes are in place, but individuals should plan conservatively and remain attentive to potential updates affecting both their own and family members’ Medicaid coverage. Expect modest adjustments to Social Security and continued shifts in Medicaid eligibility rules in the years ahead.
The Big Reshuffling
While uncertainty remains part of the investing landscape for now, we do not see this as a start of a long-term downturn—but rather a reshuffling. For long-term investors, that means new opportunities are emerging, such as more reasonable valuations, thoughtful rebalancing, and strategic tax planning that can all support future growth. Periods like this often pave the way for stronger market leadership ahead, especially when met with clarity, discipline, and patience. By staying proactive and grounded, investors can navigate this shifting environment with confidence and focus on what truly drives lasting returns.
Authors: Mark VanderPol, CFA, CFP; Richard Toth, CFA, CAIA; Noah Hoekstra
References
[1-3] Source: Quarterly Market Review – First Quarter 2025 by Dimensional Fund Advisors
[4] US Stock Market (Russell 3000 Index), International Developed Stocks (MSCI World ex USA Index [net dividends]), Emerging Markets (MSCI Emerging Markets Index [net dividends]),Global Real Estate (S&P Global REIT Index [net dividends]), Commodities (The Bloomberg Commodity Total Return Index), US Bond Market (Bloomberg US Aggregate Bond Index), Global Bond Market ex US (Bloomberg Global Aggregate ex-USD Bond Index [hedged to USD]), Crypto (S&P Cryptocurrency MegaCap Index)
[5] Source: Quarterly Market Review – First Quarter 2025 by Dimensional Fund Advisors
[6] S&P Cryptocurrency MegaCap Index (holdings are Bitcoin + Ether)
[7] Based on Z-Score
[8] Source: Morningstar Office
[9] Source: Quarterly Market Review – First Quarter 2025 by Dimensional Fund Advisors
[10] Federal Reserve Bank of Atlanta’s GDPNow as of 4/16/2025
[11] Source: https://www.cnbc.com/2025/03/31/first-quarter-gdp-growth-will-be-just-0point3percent-as-tariffs-stoke-stagflation-conditions-says-cnbc-survey.html
[12-13] Source: U.S. Bureau of Labor Statistics
[14] Source: https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html
[15] Source: https://www.woodworkingnetwork.com/news/woodworking-industry-news/millerknoll-steelcase-release-tariff-warnings
[16] Source: https://www.ssa.gov/news/press/releases/2024/#2024-10-10
Disclosures
VanderPol Investments, LLC (“VPI”) is a registered investment adviser located in Michigan. VPI may only transact business in those states in which it is registered, or qualifies for an exemption or exclusion from registration requirements.
This presentation is limited to the dissemination of general information regarding VPI’s investment advisory services. Accordingly, the information in this presentation should not be construed, in any manner whatsoever, as a substitute for personalized individual advice from VPI. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Any client examples were hypothetical and used to demonstrate a concept.
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