Introduction: The Shape of Uncertainty
The first week of April 2025 offered a case study in economic contradictions and policy whiplash. Investors watched markets tumble under the pressure of sweeping new tariffs, only to be tempered slightly by a robust jobs report. It was a week where labor strength clashed with policy risk, where the reaction function of markets turned sour, and where investors were reminded—yet again—that being diversified isn’t just a mantra, it’s a lifeline.
This week’s blog post unpacks what happened in the markets last week, analyzes the broader macro landscape, and closes with a deep dive into what Kestra Investment Management (KIM) did before the sell-off to brace portfolios for volatility.
What Happened Last Week: Labor Strength vs. Tariff Turbulence
The equity markets entered the first week of Q2 already skittish, and a newly announced 10% baseline tariff on nearly all imported goods lit the fuse on a broad selloff. This shock to the system triggered an immediate risk-off move. Investors fled equities—particularly growth names—and found fleeting refuge in fixed income. Tariffs have always been a double-edged sword: framed politically as a pro-growth, pro-American manufacturing tool, they often translate economically into higher consumer prices and margin compression.
Yet amid the chaos, the March jobs report emerged as an unexpected buoy. Nonfarm payrolls rose by 228,000, far surpassing the consensus estimate of 135,000. It was a signal that the real economy—at least in the labor market—remains sturdy. However, the celebration was brief. Revisions to the previous two months' job gains saw 48,000 jobs shaved off, pulling the strong headline figure back toward a more muted reality.
The Challenger layoffs report, meanwhile, revealed 275,000 job cuts, a noticeable spike that casts a shadow on the positive payroll data. Job openings fell to 7.568 million, a sign of waning labor demand. ISM Manufacturing and Services PMIs dropped to 49.0 and 50.8, respectively, hinting at contraction and stagnation in two critical segments of the economy.
Sector performance underscored the tension. Technology led the decline with a -22.6% year-to-date return, while utilities and consumer staples—traditionally defensive sectors—weren't spared, falling -20.5% and -14.3%, respectively. Investors were clearly reacting to the tariff shock, not just rotating within the market, but pulling money out altogether.
Macro Landscape: Structural Forces, Policy Shocks, and Demographic Shifts
What we are seeing now is a test of structural resilience versus policy-induced volatility. The broader U.S. macro environment is still grounded in relatively strong fundamentals: a solid labor market, consumer spending buoyed by wage growth, and disinflation in key categories. However, policy disruptions—especially tariffs—have introduced exogenous shocks that threaten to derail this progress.
Labor Market Dynamics Despite headlines of layoffs and slowing job openings, the underlying labor market remains resilient. Unemployment is historically low, and participation rates are steady. However, the composition of the labor force is evolving. According to the latest chart from JP Morgan, foreign-born workers now make up:
Sectors like construction (29%), professional and business services (23%), and “other services” (22%) rely heavily on immigrant labor. Any disruption to immigration policy or enforcement can ripple through the labor supply, particularly for skilled trades and service roles. In contrast, industries less dependent on immigration, like financials and information, show higher wages and less exposure to policy changes.
Style and Sector Rotation Value continues to outperform growth, a reflection of both rising interest rates and defensive repositioning. Large-cap growth stocks, which were darlings of the post-pandemic bull market, have underperformed sharply as valuations come under pressure.
This is more than rotation—it’s a re-pricing of risk. Mid-cap and value stocks, with stronger balance sheets and less exposure to speculative capital, have shown relative resilience. Kestra’s decision to tilt away from small caps and toward mid caps aligns with this trend.
Rate and Yield Movements Interest rates are stabilizing but remain elevated. The 10-year U.S. Treasury yield sits just above 4.0%, while the 2-year is near 3.68%. This flatter yield curve, while no longer inverted, suggests tempered expectations for growth. Mortgage rates and corporate borrowing costs remain high, pressuring housing and capex decisions.
Fixed income returns are showing strength, particularly in short-duration corporates and municipals:
· U.S. Aggregate: +1.12% weekly
· Municipals (10yr): +1.67%
· Investment Grade Corporates: +0.55%
These movements show a modest flight to safety and repositioning for income amidst volatility.
Commodity and Currency Markets Commodities surged, with oil (WTI) rising to $87.37 per barrel. This suggests geopolitical or supply-driven price action—perhaps in response to the trade policy shift. Gold also climbed to $2,294, signaling investor demand for safe-haven assets.
Currency movements were mixed. The dollar remained strong against the yen and euro, reflecting global risk aversion and U.S. economic leadership despite volatility.
JP Morgan’s Weekly Data Center shows broad-based weakness across major U.S. indices:
· S&P 500 YTD: -9.56%
· Nasdaq YTD: -9.88%
· Russell 2000 YTD: -9.18%
This isn’t a correction isolated to one segment. It’s systemic repricing amid policy shock.
Tariffs as a Structural Shock Tariffs are often used as tools for geopolitical leverage or domestic industry protection. But their near-term effects often include higher costs for consumers and disruptions in global supply chains. With a 10% baseline tariff hitting nearly all imports, the inflationary consequences are inevitable.
Kestra’s April commentary made this clear: tariffs would lead to higher prices and slower growth in the short run. But not all sectors will suffer equally. Companies with local supply chains, pricing power, and value-driven business models may benefit.
Kestra Investment Management: Preparing for the Storm
While the market's initial response to new tariffs was swift and unforgiving, Kestra Investment Management had already begun implementing changes in its model portfolios weeks in advance. Anticipating volatility from both macroeconomic headwinds and policy uncertainty, KIM made strategic shifts across both dynamic and strategic models.
First, KIM reduced its overweight to U.S. equities, reallocating toward developed international markets, particularly with a value tilt. This was a clear acknowledgment that diversification isn’t just about owning more names—it’s about owning different sources of return and risk. U.S. large growth, which had become increasingly vulnerable due to valuation concentration, was trimmed. Instead, allocations were increased to U.S. value and international equities, especially mid-caps that offered better fundamentals and lower volatility relative to small caps.
In fixed income, KIM added to high-quality investment-grade bonds, emphasizing short duration to reduce interest rate sensitivity. Exposure to long-dated Treasuries was cut, favoring corporate bonds and mortgage-backed securities. Notably, allocations to actively managed bond funds were increased, providing KIM’s portfolio managers the flexibility to navigate sudden shocks like the one markets experienced post-tariff announcement.
KIM’s strategy also included increasing exposure to fixed income across risk profiles in their dynamic models. This move wasn't just a flight to safety—it was a rebalancing mechanism, cushioning portfolios while preserving the ability to capture yield in an environment where equities could falter but rates might not.
Crucially, Kestra did not panic. The adjustments weren’t knee-jerk reactions. They were measured, strategic shifts informed by a deep understanding of macro conditions and historical precedent. As they noted in their commentary (click here to read our email from Friday, April 4 that breaks it down), the S&P 500’s worst 10 days since 1950 were often followed by outsized 3-month and 1-year returns. This historical resilience underpinned Kestra's emphasis on staying invested and avoiding the emotionally charged urge to time the market.
KIM entered April with a game plan. Their decision to lean into value, tighten equity exposure, rework their bond allocations, and emphasize diversification wasn’t about escaping volatility—it was about using it as a tool. Markets punished unprepared portfolios, but those built on foresight and adaptability fared far better. And for investors who stayed the course, the lesson was clear: time in the market still beats timing the market.
Conclusion: Principles Over Panic
As April’s volatility reminds us, market disruptions are inevitable—but how you prepare defines the outcome. The juxtaposition of a strong labor market with aggressive trade policy revealed the complexity of today’s investment landscape. Add in declining PMIs, spiking layoffs, and concentrated sector weakness, and the picture sharpens: This is not a market for passengers. It’s one for planners.
One of the many reasons we partner with Kestra Investment Management is that they had a roadmap and proactively repositioned portfolios before the headlines hit. Their actions reflected more than just tactical adjustments; they illustrated how philosophy, preparation, and data can align to defend and grow wealth.
The lesson isn’t new, but it’s worth repeating. Diversification is not dead. Discipline is not outdated. And downturns—though painful—are often preludes to long-term gains.
Stay invested. Stay diversified. Stay calm.
Video Version Available HERE
Charts and disclosures: JP Morgan available HERE and Kestra Investment Management available HERE.