MARCH 2025 MARKET UPDATE
03/07/2025
Investors may want to consider rotating from cash to Treasuries and/or corporate bonds.
Thrivent Asset Management contributors to this report: Steve Lowe, CFA, chief investment strategist; John Groton, Jr., CFA, director of administration and materials & energy research; Matthew Finn, CFA, head of equity mutual funds; and Charles Hofstrom, CFA, senior product specialist
Short-term data shows a weakening economy.
We expect slower but continued growth.
The economy: Economic data released over the month generally indicated the economy was slowing at a greater-than-expected rate. Employment data was modestly below expectations and retail sales saw its largest drop in two years, in line with personal spending which saw its largest decline since 2021. Additionally, consumer debt was reported higher while the savings rates moved up with higher income combined with less spending. The Institute for Supply Management’s (ISM) index of manufacturing strength fell more than expected. But it was the Atlanta Federal Reserve’s GDPNow indicator that spooked markets when it showed a drop in the current quarter’s estimated gross domestic product (GDP) from 2.3% to -1.5%.
Stocks: The S&P 500® Index set another new high in February, before growing concern over current and forecasted economic data weighed on sentiment, causing the index to end the month down 1.42%. Reported earnings were generally supportive, though Nvidia Corporation lost $273 billion in value the day after announcing earnings that disappointed (generally high) expectations. However, what mattered most to investors as the month progressed was less about the backward-looking economic or earnings data, but rather the forward-looking prospects for growth and inflation as tensions escalated over trade policy.
Bonds: Treasuries have had the best start to a year since 2020 when COVID-19 emerged as interest rates fell, boosting bond prices. When the year began, yields were near multi-year highs, making them attractive on an absolute basis, but weaker economic data and growing risks to growth steadily encouraged investors to consider a more favorable outlook for inflation slowing, and a greater chance that the U.S. Federal Reserve (Fed) would lower its target interest rate sooner than had been expected.
The economy: The economy is weakening faster than expected but we caution investors against extrapolating long-term trends too soon based on short-term data. The past month has contained a lot of economic and political headlines that create uncertainty, and thus market volatility, but does not indicate firm confirmation of a sustainable trend. While the economy entered the year in a strong position, risks to growth are rising with significant uncertainty over tariffs and other policies weighing on consumer and business confidence. We expect slower but continued growth despite growing odds of a more meaningful slowdown. In our view, it is too early to make meaningful strategic changes to long-term positioning in stock and bond markets.
Stocks: We maintain a modest overweight to equities over fixed income given our structurally positive long-term outlook for the economy and our bias towards prioritizing economic fundamentals as the primary determinate of investment returns over the long term. But we caution that shorter-term volatility is likely to persist, whether due to concerns about large-cap valuations, the volatility in economic data which comes with turning points in the economy, ongoing trade negotiations or geopolitical factors. We would use any material dip in equities, such as a correction (-10% or more) or bear market (-20% or more), as an opportunity to add equities with a view toward the long term.
Bonds: Treasury yields have fallen with growing concerns over slowing growth, performing well as a hedge against economic uncertainty. We continue to expect Treasury yields to remain in a range, though volatile within that range. While a slower economy would pressure yields lower, there are still forces pushing up rates, including sticky inflation and likely higher prices from tariffs. As such, we maintain our more neutral strategic stance, focused on shorter-term maturities, which would benefit from Fed rate cuts. Within corporate bonds, we prefer high quality investment-grade bonds.
A wide range of U.S. economic data released in February showed weakness below consensus expectations, prompting some Wall Street firms to cut their first-quarter growth forecasts. For example, the ISM Manufacturing Index fell more than expected in February, though the prices paid component was sharply higher than in January, while the new orders components was sharply lower. But the data that startled the market was the Atlanta Federal Reserve’s GDPNow indicator, which attempts to estimate the current quarter’s GDP. After projecting growth near 2.3% in January, the estimate plunged to a -1.5% contraction in GDP in February and then fell again to -2.8% in early March. However, a key cause of the decline was a surge in imports as companies raced to get in front of tariffs, which does not reflect on the underlying trend in the economy.
Consumer confidence fell by the most since August 2021, according to The Conference Board Consumer Confidence Index (CCI), and was the third month in a row that the measure has declined. Consumers expressed concern about the strength of the economy and higher inflation. The University of Michigan’s Consumer Sentiment Index showed long-term inflation expectations hitting its highest level in three decades, a sentiment largely attributed to concern that tariffs could push prices higher.
Confirming this shift in sentiment is consumer behavior as retail sales fell in January by the most in almost two years, down 0.9%. Meanwhile, the Fed reported consumer debt rose $22.9 billion in December, most of which ($18 billion) was non-revolving borrowing (such as car loans), the largest rise in two years. And delinquency rates are rising, with around 3.5% of credit card payments more than 30 days past due.
February’s employment report showed 151,000 new jobs were created during the month. This was below consensus expectations for 170,000 new jobs, but near the average monthly gain of 168,000 over the past year. Additionally, the 143,000 jobs added in January was revised down to 125,000.
The national unemployment rate moved up slightly to 4.1%, while average hourly earnings rose by 0.3% (in line with expectations), a 4.0% increase from February of last year (lower than the consensus forecasts near 4.2%).
January’s month-on-month Consumer Price Index (CPI) data showed the largest rise since August 2023, at 0.5%, driven by everyday items like gas, food and housing costs. Core CPI (which excludes the more volatile food and energy sectors) rose 0.4%, above consensus expectations and the largest month-on-month increase in core prices since April of 2023.
January’s Core Personal Consumption Expenditures (PCE) Price Index data, which is the Fed’s preferred inflation measure, was more encouraging, rising 2.6% from January 2023, in line with expectations. Month-on-month Core PCE was again 0.3%, also in line with expectations.
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The benchmark S&P 500 Index of large-cap stocks managed to set a new high mid-month, but waning sentiment late in month resulted in the index closing February down 1.40% (-1.30% including dividends), and up just 1.24% for the year. Concern about the economic impact of escalating trade tensions was a significant contributor to the weaker performance, but disappointing economic data, less supportive inflation data and concerns about the outlook for mega-cap technology and technology-related companies were also factors. The consumer discretionary sector saw the largest decline (down 9.37% over the month), largely driven by especially poor performances from Amazon Inc. and Tesla Inc.
The benchmark Russell 2000 Index of small-cap stocks fell 5.45% as economic uncertainty weighed particularly heavy on smaller companies. The technology-heavy NASDAQ Composite Index® fell 3.97% over the month.
The table below shows the past month and year to date performance results of the 11 sectors:
The MSCI ACWI ex-USA Index, which tracks stocks across developed and emerging-market economies across the world (excluding the U.S.) rose 1.26% in February, outperforming broad-based U.S. indices. Gains were driven by European equities, which generated the highest returns of all the major regional equity indices, with Europe ex-U.K. rising 3.4% in February. Initially, prospects for a cease-fire in Ukraine encouraged investors, and then found support from encouraging inflation data and strength in European defense contractors on expectations of a significant increase in regional defense spending. Asian equites were generally stronger during the period, supported by solid performance in Chinese stocks despite late-month wobbles over tariffs. Japanese equities were relatively weak, falling 3.8%, largely as a result of continued yen strength.
The yield on the benchmark 10-year U.S. Treasury note fell 0.35%, to 4.19% at the end of February from 4.55% at the end of January—helping Treasuries to their best start for a year since 2020. At the start of the year, yields were near multi-year highs, making them attractive on an absolute basis, but weaker economic data and growing risks to growth due to escalating trade tensions encouraged investors to consider a more favorable outlook for inflation and a greater chance the Fed would lower interest sooner than had been expected. Treasury Inflation-Protected Securities (TIPS) also rallied, further signaling that confidence was growing that inflation may remain contained.
Investment grade corporate bonds had another strong month, helped by falling Treasury yields and broadly supportive corporate fundamentals. The Bloomberg U.S. Aggregate Bond Index rose 2.2% in February, bringing its year-to-date gain to 2.74%. High-yield (sub-investment grade) corporate bonds underperformed but still rose 0.6% over the month.
The Nominal Trade-Weighted U.S. Dollar Index fell 1.04% over the month of February. The decline was predominately driven by uncertainty over trade policy, but strength in the euro and Japanese yen also contributed to the U.S. dollar’s relative weakness. The euro was supported by expectations for higher defense spending while the yen continued to strengthen on expectations for rising interest rates in Japan.
The S&P GSCI Index (a broad-based and production-weighted index representing the global commodity market) fell 1.48% in February. The price of gold continued to rise in early February, fueled by global central bank demand and concerns about inflation. But late in the month, concerns about the impact of tariffs on the economy and inflation tempered demand for gold and commodities broadly. Oil prices were also down sharply, with a barrel of West Texas Intermediate (a grade of crude oil used as a benchmark in oil pricing) falling 3.82% over the month.
Media contact: Callie Briese, 612-844-7340; callie.briese@thrivent.com
All information and representations herein are as of 03/07/2025, unless otherwise noted.
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Thrivent Asset Management, LLC associates. Actual investment decisions made by Thrivent Asset Management, LLC will not necessarily reflect the views expressed. This information should not be considered investment advice or a recommendation of any particular security, strategy or product. Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance.
This article refers to specific securities which Thrivent Mutual Funds may own. A complete listing of the holdings for each of the Thrivent Mutual Funds is available on thriventfunds.com.
GDPNow is not an official forecast of the Atlanta Federal Reserve. Rather, it is best viewed as a running estimate of real GDP growth based on available economic data for the current measured quarter.
The S&P 500® Index is a market-cap weighted index that represents the average performance of a group of 500 large-capitalization stocks.
The Russell 2000® Index is an unmanaged index considered representative of small-cap stocks.
The MSCI ACWI ex-USA Index is an unmanaged index considered representative of large- and mid-cap stocks across developed and emerging markets, excluding the U.S.
The Bloomberg U.S. Aggregate Bond Index is an unmanaged index considered representative of the U.S. investment-grade, fixed-rate bond market.
The Federal Funds effective rate is the interest rate at which depository institutions (mainly banks) lend reserve balances to other depository institutions overnight on an uncollateralized basis. In simpler terms, it's the rate banks charge each other for short-term loans to meet their reserve requirements.
The Consumer Confidence Index (CCI) is a survey administered by the Conference Board. The CCI measures what consumers are feeling about their expected financial situation, whether that's optimistic or pessimistic.
The Consumer Price Index measures the monthly change in prices paid by U.S. consumers for a basket of goods and services.
The Personal Consumption Expenditures (PCE) Price Index, also known as consumer spending, is a measure of the spending on goods and services by people of the U.S.
The Core Personal Consumption Expenditures (PCE) Price Index, also known as consumer spending, is a measure of the spending on goods and services, excluding food and energy prices, by people of the U.S.
The Nominal Trade-weighted U.S. Dollar Index measures the value of the U.S. dollar based on its competitiveness versus trading partners.
The Institute for Supply Management (ISM) survey is a monthly indicator of U.S. economic activity based on a survey of purchasing managers at manufacturing firms nationwide.
Any indexes shown are unmanaged and do not reflect the typical costs of investing. Investors cannot invest directly in an index.
Past performance is not necessarily indicative of future results.
The University of Michigan Consumer Sentiment Index is a consumer confidence index published monthly by the University of Michigan.
The Nasdaq Composite Index is a stock market index that includes almost all stocks listed on the Nasdaq stock exchange. The Nasdaq – National Association of Securities Dealers Automated Quotations – is an electronic stock exchange with more than 3,300 company listings.
The Core Consumer Price Index measures the monthly change in prices paid by U.S. consumers for a basket of goods and services, excluding food and energy prices.
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