Capital Markets Perspective | May 2025

We learned that the U.S. economy shrank during the first quarter of the year for the first time since early 2022, contracting by 0.3%. That reduction was directly attributable to a surge in imports as businesses and consumers accelerated purchases ahead of tariffs, primarily in the categories of consumer goods (chiefly medicinal, dental, and pharmaceutical) and capital goods (mainly computers, peripherals, and parts), according to the Bureau of Economic Analysis.  Both of those trends should reverse course in the near term, if they haven’t already. But how the other components of Gross Domestic Product (GDP) fair in the second quarter is of course a mystery at present. What we do know as we reach the midpoint of earnings season, is that a large number of companies across a wide range of industries have used their earnings calls to temper investor expectations, with many pulling guidance altogether.

But job growth in April came in at a healthy 177k, well ahead of expectations for 138k, and the unemployment rate remained at 4.2%. All of which, while positive, has made the Federal Reserve’s job even more difficult as they are being pressured to lower rates. Indeed, the Fed agreed to stay on the sidelines, with chairman Powell stating that the central bank is in no rush to make rate cut decisions.  “It’s not a situation where we can be pre-emptive because we actually don’t know what the right response to the data will be until we see more data,” he said. Bolstering the decision to hold off on cuts is data from the Fed that indicates that about 75% of manufacturing firms and close to 50% of service firms are or plan to pass along higher tariff-related costs to consumers. Therein lies the worry for the Fed.

Despite all the hand-wringing year to date, with admittedly plenty of valid reasons to do so, the total U.S. stock market is only down 5.2%, the total global equity market is essentially flat, and the U.S. bond market is up 3.2%, so most diversified investors are probably doing okay. And Corporate executives, suffering the same angst as the typical consumer, have authorized share buybacks of $377 billion through mid-April, which is 19% higher than the same period last year and the highest dollar volume over at least the last 14 years, according to Goldman Sachs. Evidently, they aren’t all that scared…or just maybe they need to do everything they can to ensure their stock-performance based bonuses are healthy in what they otherwise think will be a less than stellar year.

What happened in the markets in April?

EQUITIES: NON-DOLLAR ASSETS MAINTAIN LEAD

With the U.S. dollar in free-fall, international developed stocks, both small and large, outperformed U.S. assets dramatically. The spread between international small caps and U.S. small caps was over 7%, and for large caps it was about 500 basis points (bps). Currency moves accounted for all but 60 bps of the large cap difference, with U.S. stocks finishing lower by about 0.7%. Emerging market equites returned 1.4%.

At the sector level in the U.S., energy stocks followed oil and natural gas lower, losing about 14%. Media stocks also took it on the chin, returning -4.7%, and health care shares shed 3.6%. On the plus side, tech shares outperformed, gaining 1.5%, with consumer staples a close second at 1.3%.

Of note, downward earnings revisions have spiked in the U.S. to levels last seen during the pandemic, while in Europe they remain within their historic range.

BONDS: INTRA-MONTH VOLATILITY ENDS WITH BROAD MARKET GAINS

The yield on the 10-year Treasury increased by about 50 bps from its intra-month low to its high before settling back to where it began the month. That volatility didn’t present itself to investors focused on the month as a whole, which saw the U.S. bond market advance by 40 bps, with mortgage-backed securities, asset backed securities and shorter term Treasuries all performing reasonably well.

Credit experienced its own wild ride, with option adjusted spreads on high yield blowing out by 120 bps intra-month, before ending 39 bps higher. Investment grade corporate spreads also widened meaningfully, going from 0.96 on April 2^nd to 1.21 on the 9^th, but finished only 12 bps higher for the month. And after all the gyrations, high yield bonds eked out a 2 bp gain for the month, while investment grade corporates lost only 6 bps.

Bringing up the rear were long-term Treasuries, which shed 1.14%. TIPS advanced by 7 bps as the real 10-year rate fell by 0.2%.

COMMODITIES: INDUSTRIAL METALS AND ENERGY FORESHADOW SLOW GROWTH

Oil prices continued their downward trend on concerns of a slowing economy and OPEC’s proposed increase in production in the coming months. WTI crude futures fell by almost 18% and Brent crude futures declined by just over 17%. Reacting to the trend, U.S. oil companies are scaling back operations as oil prices approach breakeven for many (there will be no “drill baby, drill” in the near term). Elsewhere in the energy complex natural gas again plummeted, losing about 18% on a warmer-than-normal start to spring and relatively high production.

Precious metals turned in a solid month as a group, but were held up solely by gold (+5.7%), as platinum and silver were down 5.3% and 5.7%, respectively.

Industrial metals went the way of energy on economic concerns, falling 6.9% as a group, while agricultural futures ended 1.2% higher.

How are Frontier strategies positioned?

ALLOCATION CHANGES

Due to the complexities of attempting to generalize about allocation changes across our Core, Specialty, Tax-Managed, Multi-Asset Income, Active ETF, and Faith-Based Strategies, and the additional difficulties of properly conveying how those asset allocation changes flow through to trade level activity, we instead direct clients to our monthly trade summaries, which describe in detail what trade activity occurred by strategy, and why.

Focusing on our Core Strategies, relative to their long-term asset allocations, which serve as policy portfolios guiding our dynamic allocation decisions, we favor U.S. and international small caps, emerging market equities, managed futures, floating rate loans, TIPS, and cash/short term bonds. We are generally underweight U.S. and international large cap stocks, REITs, commodities, and both high-yield and high-quality bonds at the asset allocation level, but differences between the asset allocations and actual exposure at the fund level can and will occur. At the beginning of May, our asset allocation models reduced exposure to managed futures, high quality bonds, and T-bills (the latter within the more conservative strategies), while adding modestly to high yield bonds.

Expected returns fell month-over-month for non-dollar assets (which have outperformed of late), T-bills, and managed futures, and increased for U.S. small caps, commodities, and high yield bonds.

PERFORMANCE ATTRIBUTION

Frontier’s equity positioning was mixed for the month. International small caps and emerging markets, which we have been overweight, far outpaced U.S. large caps and REITS, benefiting our strategies. But we were modestly underweight international developed large caps, which performed quite well, and had meaningful allocations to U.S. small caps that significantly detracted from both absolute and relative returns.

Within fixed income, being underweight high quality bonds was a negative, as they outperformed all other fixed income sectors. However, our strategies were underweight duration, which certainly helped on a relative basis, as long-term Treasuries, a preferred equity hedging asset, underperformed the rest of the bond market. Managed futures, which we also utilize due to the lack of correlation with equities detracted from both relative and absolute returns during the month.