Mercer market review 

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Global equity and fixed income performance was mostly negative in March. US equities materially underperformed international developed and emerging market equities. Global small caps outperformed large caps, while US value outperformed growth, although both were negative in absolute terms (as measured by Russell 3000).

Tariffs continued to dominate news headlines in March. At the start of March, an additional 10% tariff on China and the previously deferred tariffs on Mexico and Canada went into effect. Canada announced retaliatory tariffs. The US announced an additional 25% tariff on steel and aluminium imports from Canada, to which Canada countered with even more tariffs of its own. The EU also announced a retaliatory tariff set to take effect on 1st April. At the end of March, President Trump announced 25% tariffs on overseas-made auto imports. Equities fell on tariff announcements due to the uncertainty the ongoing negotiations create for businesses and consumers. Markets are awaiting the reciprocal tariff announcement on 2nd April.

Economic data was generally weak. Nonfarm payrolls for February were slightly weaker than expected rising to 151,000. The unemployment rate increased slightly to 4.1% in February. US consumer sentiment as measured by University of Michigan Survey fell to its lowest level since November 2022. The Five-year consumer inflation expectations rose to 3.9% the highest since the 1990s. US services PMI rebounded into expansionary territory from a two-year low, but manufacturing PMI fell into contractionary territory.

Headline inflation in the US surprised to the downside rising only 2.8% year-over-year in February. Core CPI also rose less than expected. PCE inflation, on the other hand, came in ahead of forecasts. Headline inflation in other developed markets eased for February. Despite easing headline inflation, the Federal Reserve left rates unchanged, noting that uncertainty around the inflation outlook had increased. The BOE and BOJ also left rates unchanged.

President Trump continued efforts to de-escalate the conflict in Ukraine and brokered a deal for a maritime ceasefire between Russia and Ukraine, though Ukraine has claimed Russia did not adhere to it. The US also proposed a new critical minerals deal to Ukraine. Tensions in the Middle East escalated as Israel conducted airstrikes against Hamas and sent ground troops back into Gaza. There also was a resumption of conflict between Israel and Hezbollah in the north. These two escalations scrapped previously negotiated cease fires. These conflicts did not offset expectations of lower energy demand caused by tariffs, resulting in falling oil prices. In the UK, the chancellor announced the Spring Statement with fiscal spending cuts as the major headline. In Germany, the parliament passed the incoming government’s plans to loosen the debt brake and increase defence and infrastructure spending.

The US dollar weakened during March amid broad economic uncertainties and retaliatory tariffs. Rate-sensitive real assets such as global REITs had weak returns whilst listed infrastructure was positive through March. Natural resource equity performance was positive as oil prices increased. Gold prices had strong returns of 10.6%, outperforming equities and fixed income. 

Global equity markets declined in the first quarter as strong performance for international equities was offset by weak US returns. The Federal Reserve (‘Fed’) continued their cautious approach. Tariffs dominated headlines throughout Q1 with tariffs on Mexico & Canada early in the quarter initially being delayed before finally being implemented even if USMCA-covered goods remained exempt. China saw a significant increase in tariffs over the quarter. In mid-March, broad steel and aluminium tariffs were added, drawing retaliation from the European Union. Post quarter end, the Trump administration also announced on 2/4 that reciprocal tariffs would be applied against all trade partners, with a 10% baseline and much higher tariffs on individual countries. Markets showed muted reactions at first, but as tariffs appeared to emerge as broad policy preference, trade fears sparked broad sell-offs in the U.S. equity market in the first quarter with a much more severe market reaction post quarter end. An additional headwind was the release of China’s AI tool ‘DeepSeek’ which questioned the narrative of unchallenged US leadership in AI and made investors wonder if the large AI investments can be recouped if cheaper AI alternatives come to the market.

Yields fell as investors looked for less risky assets and inflation cooled in February. The 2-year Treasury yield fell by ~36 bps from 4.25% to 3.89% during Q1, while the 30-year Treasury yield fell by ~19 bps from 4.78% to 4.59%. Credit spreads widened slightly during quarter. Gold rose materially due to safe haven demand and falling real yields, while concerns about slowing growth led to a drop in oil prices.

The Bloomberg US Aggregate Bond Index returned 2.8% in Q1 as falling yields created a tailwind for fixed income, partially offset by widening spreads. The MSCI ACWI returned -1.3%. As a result, a traditional 60/40* portfolio was basically flat.