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Weekly Commentary

Investment Commentary – April 14, 2025

Stuart Katz

Executive Summary

A few themes jumped out to us last week including softer inflation readings and encouraging bank earnings season reports and guidance. The parts of the consumer price index (CPI) report that had the softest pricing were more discretionary items like airfare and lodging away from home. Shelter came in at only 0.2% m/m, bringing it to 4.0% y/y, which is the lowest since 2021. The producer price index (PPI) report also came in below expectations. Typically, the bond market rallies (price up / yield down) when there are inflation readings weaker than expectations.  However, the 10-year Treasury yield increased (price down).  Despite higher yields, the U.S. dollar weakened another 3%.  This recent unusual relationship may be attributable to some combination of trade related fiscal policy concerns (potential deficit concerns), foreign investors meaningfully selling (esp China) U.S. Treasuries (we don’t see or hear any current evidence to support this narrative), and a technical unwinding of Treasury holdings sparked by margin calls on a consensus “basis trade” arbitrage strategy.  The strategy uses leverage to exploit the price difference between Treasury securities and their corresponding futures contracts. Finally, we believe factors moderating inflationary pressures include slower house price gains and commodity prices being well anchored. These considerations will likely be more relevant over time in helping pressure bond yields stabilize and potentially decline.

Equities

The S&P 500 returned 5.7% as President Trump announced a 90-day pause on the reciprocal tariffs announced the week before. Volatility remained high as traders reacted wildly with every passing headline; bond yields surged as consumers ratcheted up inflation expectations and investors casted doubt on the safe-haven status of U.S. treasuries. Mid cap and small cap stocks lagged, returning 3.6% and 1.8%, respectively. Technology (+9.4%), communication services (+6.5%), and industrials (+6.5%) were the best performing sectors in the S&P500; energy (-0.4%) and real estate (-0.1%) were the laggards. EAFE markets returned -0.8%; EM markets returned -3.8% as the administration ramped up its trade war with China (-7.8%) with escalating tariffs.

From a valuation perspective, only U.S. large caps trade above +1 standard deviation based on historical forward P/E ratios with the S&P 500 at +0.7. The NASDAQ is at +0.4. For the next 12 months, EPS growth for S&P 500 is expected to be 9.2% (vs. 6.9% annualized over the last 20 years). For the next 12 months, EPS growth for NASDAQ is expected to be 15.7% (vs. 10.7% annualized over the last 20 years). The S&P 500 (US Large Cap), NASDAQ, MSCI EAFE (Non-US Developed Market Equities), and MSCI EM (EM Equities) trade at or above their 20-year averages based on forward P/E ratios while the Russell Midcap (US Midcap) and the Russell 2000 (US Small Cap) trade below.

Fixed Income

Investment grade fixed income sectors had negative returns as yields rose sharply across the curve. Municipals returned -3.7%, US AGG returned -2.5% and U.S. IG returned -2.8%. HY bond returned -0.7% as spreads compressed 8bps while bank loans returned -0.2%. EM debt returned -2.1% as the U.S. dollar fell 2.8%.

Rates

Rates rose sharply across the curve as consumers ratcheted up inflation expectations and investors casted doubt on the safe-haven status of U.S. treasuries. The recession-watch 3M-10Y spread widened 42bps to +15bps. The 2Y-10Y spread rose 19bps to +52. Rates rose in Japan and the U.K. but were mostly flat in Europe. The BTP-Bund spread is at 1.24%. 5-year breakeven inflation expectations rose 2bps to 2.42% (vs. a low of 1.88% on Sept 10); 10-year breakeven inflation expectations rose 4bps to 2.23% (vs. recent low of 2.03% on Sept 10); the 10Y real yield surged 46bps to 2.6%. The market now expects between three and four cuts in 2025 vs the Fed’s guidance of two cuts. At year-end 2025, the market expects the Fed Funds rate to be 3.5% vs. the Fed’s guidance of 3.75%-4.00%.

Currencies/Commodities

The dollar index fell 2.8%. The commodities complex rose 0.6%, while energy prices fell 1.9% for the week. Brent prices fell 1.3% to $65/bbl. U.S. natural gas prices fell 8.1% while European gas fell 5.2%, both due to forecasts for slower economic growth.

Market monitors

Volatility fell for equities but remained elevated and rose for bonds (VIX = 38, MOVE = 137); the 10-year average for each is VIX=18, MOVE = 78. Market sentiment (at midweek) improved from -40 but remained negative at -30.

Volatility rose sharply for equities and for bonds (VIX = 45, MOVE = 126); the 10-year average for each is VIX=18, MOVE = 78. Market sentiment (at midweek) remained negative at -40.

Disclosure and Source

Investment Commentary Sources: Bloomberg. Investment advisory services offered through Robertson Stephens Wealth Management, LLC (“Robertson Stephens”), an SEC-registered investment advisor. Registration does not imply any specific level of skill or training and does not constitute an endorsement of the firm by the Commission. This material is for general informational purposes only and should not be construed as investment, tax or legal advice. It does not constitute a recommendation or offer to buy or sell any security, has not been tailored to the needs of any specific investor, and should not provide the basis for any investment decision. Please consult with your Advisor prior to making any Investment decisions. The information contained herein was carefully compiled from sources believed to be reliable, but Robertson Stephens cannot guarantee its accuracy or completeness. Information, views and opinions are current as of the date of this presentation, are based on the information available at the time, and are subject to change based on market and other conditions. Robertson Stephens assumes no duty to update this information. Unless otherwise noted, any individual opinions presented are those of the author and not necessarily those of Robertson Stephens. Indices are unmanaged and reflect the reinvestment of all income or dividends but do not reflect the deduction of any fees or expenses which would reduce returns. Past performance does not guarantee future results. Forward-looking performance targets or estimates are not guaranteed and may not be achieved. Investing entails risks, including possible loss of principal. Alternative investments are only available to qualified investors and are not suitable for all investors. Alternative investments include risks such as illiquidity, long time horizons, reduced transparency, and significant loss of principal. This material is an investment advisory publication intended for investment advisory clients and prospective clients only. Robertson Stephens only transacts business in states in which it is properly registered or is excluded or exempted from registration. A copy of Robertson Stephens’ current written disclosure brochure filed with the SEC which discusses, among other things, Robertson Stephens’ business practices, services and fees, is available through the SEC’s website at: www.adviserinfo.sec.gov. © 2025 Robertson Stephens Wealth Management, LLC. All rights reserved. Robertson Stephens is a registered trademark of Robertson Stephens Wealth Management, LLC in the United States and elsewhere.

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