We’ve expressed in previous updates that increased volatility was highly likely this year. And two months into 2025, we can safely say this has undoubtedly been the case. But what is going on? As of this moment, I think it’s best to follow Occam’s razor, which, in its most straightforward form, is “the simplest explanation is usually the best one.” So, what is the simplest explanation? Uncertainty. But to see the magnitude of the uncertainty, first, we’ll need to explain the Federal Reserve Board’s “Beige Book.” Let’s go.
We’ll start with the basics. There are 12 “Federal Reserve Districts” that each run operations for their region while also specializing in particular areas of financial research. Every month or so (eight times per year), they collect economic information from their regional sources in an effort to characterize the changes in economic conditions from the previous report.
Much of the information collected for the Beige Book is qualitative. Each Federal Reserve Bank gathers information through reports from interviews and online questionnaires completed by businesses, community organizations, economists, market experts, and other sources. Contacts are not random; rather, they strive to curate diverse sources that can provide accurate and objective information about a broad range of economic activities.
Once the data is aggregated, the Beige Book is consolidated and distributed, serving as a regular summary for the public. The information is used to assess economic conditions in the Federal Reserve districts. The qualitative nature of the Beige Book creates an opportunity to characterize dynamics and identify emerging trends in the economy that may not be readily apparent in the available economic data.
Unsurprisingly, many analysts try to parse the report to find trends. One of the many methods used is to analyze the number of Fed Districts that note improving versus declining economic conditions. Another method is to track the tone of the report through word analysis. One of these methods is to count word frequency.
And using word frequency, the most recent report released this week was quite interesting. The word “uncertainty” (or “uncertain”) appeared 47 times in the report, up from just 17 times in the January report. To put this into additional context, it only appeared 24 times in the report from April 2020, the peak of the COVID-19 scare. Finally, since the data began in 1970, this is about 30% higher than any other historical report. Wow!
At this point, the markets are clearly reacting to the high level of uncertainty among CEOs, business owners, investors, etc. And regardless of your political persuasion, it is also clear that the spike in “uncertainty” has coincided with the new administration’s arrival. From the on-again-off-again tariffs to the increased instability around Ukraine to the “Strategic Crypto Reserve,” there is no shortage of policy news creating instability.
This week was no exception, as more tariff talk drove equity markets crazy with some very large moves. Overall, equities are off to a sluggish start, having turned lower after a solid first six weeks. In the last two weeks, the S&P 500 has gone from up 4% YTD to down -2%. And the high-flying tech sector, which led gains over the last two years, moved from up 4% to down -6%, putting the Nasdaq in correction territory.
It’s never easy to watch the markets move like this, as the headlines tend to get more and more pessimistic. Yet, amid these swings and the heightened sense of “uncertainty” highlighted by the Beige Book, it’s important to remember that volatility is part of the investing landscape. As with any period of rapid change—whether due to geopolitical tensions or tariffs—the key is to stay focused and maintain a long-term perspective.
Markets / Economy
- Equity markets were highly volatile and moved lower throughout the week on tariff news. The S&P was down -3.1%, the Nasdaq was down -3.5%, and the small-cap Russell 2000 was down -4.0%.
- According to ADP, private businesses in the U.S. added 77K workers to their payrolls in February, the smallest increase in seven months, compared to forecasts of 140K.
- Nonfarm payrolls showed an increase of 151K jobs in February, up from a downwardly revised 125K in January but below forecasts of 160K.
- The U.S. unemployment rate rose to 4.1% in February, up from 4.0% in January, slightly exceeding market expectations.
Stocks
- U.S. equities were in negative territory. Financials and Consumer Discretionary led the decline, while Healthcare and Consumer Staples outperformed. Value stocks led growth stocks, and large caps beat small caps.
- International equities closed higher for the week. Developed markets fared better than emerging markets.
Bonds
- The 10-year Treasury bond yield increased nine basis points to 4.32% during the week.
- Global bond markets were in negative territory this week.
- High-yield bonds led for the week, followed by government bonds and corporate bonds.
