Callan prepares our 10-year Capital Markets Assumptions at the start of each year to help guide strategic planning and asset allocation for all kinds of institutional investors, including defined benefit plans, endowments, foundations, sovereign wealth funds, natural resources trusts, corporate asset pools, insurance pools, and high net worth and family office assets.

The incredible volatility that stemmed from the announcement of U.S. tariffs, the changing tariff rates, the implementation and then delay of those tariffs have all rattled markets and raised questions about whether the outlook for investing may have changed. The market reaction has been material: stock market volatility spiked the week of April 7-11, with the CBOE Volatility Index (VIX) reaching a level last seen at the start of the pandemic and, before that, during the Global Financial Crisis in 2008. The stock market rose on rumors of a delay in implementation, then fell when those rumors were denied, only to shoot back up when a delay was indeed announced, and then fell again when the market digested that a delay only moved the tariffs out and did not change the planned rates or implementation. The S&P 500 fell 4.3% in 1Q25 and is down another 4.4% through April 11, for a year-to-date decline of 8.5%. U.S. small cap is down 16.3%. Global ex-U.S. stocks showed relative strength in 1Q, with the MSCI ACWI ex-USA Index up 5.2%, suggesting a long-awaited diversification benefit from non-U.S. stocks. However, the April spike in uncertainty in the U.S. spread to non-U.S. equity markets, which saw declines of 4%-5% across all broad global ex-U.S. market segments.

The bond market spooked in April, staging a selloff, forcing prices to fall and yields to rise. The selloff suggested heightened fears of inflation and a shift in the Fed’s interest rate policy, from cutting rates to holding steady at current levels or even increasing to fight a rise in inflation. It is unclear who is selling Treasuries. Non-U.S. investors hold 30% of total Treasuries, and the fear of a falling dollar and rising rates may have been one of the triggers for the selloff. The Bloomberg Aggregate US Bond Index fell 2.5% in just one week, although year-to-date returns are positive. Volatility in the stock market is common and rarely impacts policymakers, but they pay attention to the bond market. The administration has also declared that a weakening dollar is one of its goals in the coming years, which would also make imports more expensive.

How This Affects, or Not, our Callan 2025 CMAs

How should we view this recent market upheaval in the context of Callan’s 10-year forecast? Has the world changed sufficiently to compel a change to our 10-year outlook before our next annual cycle at the end of this year? First and foremost, the true impact of the tariffs is still a moving target. The delay did not change any of the proposed rates, countries, or industries as of the date of the delay (April 9). The speculation is that the delay provides time for negotiation, which then suggests the final impact could change substantially. As the tariffs sit now, the potential for higher inflation and curtailed demand due to higher prices could trigger a recession. The ability for lower demand to push down prices will be limited for imported goods saddled with tariffs. If the tariff rates are lowered or coverage is lessened, the impact will be reduced.

Second, we anticipate at least one if not two recessions/market drawdowns in our 10-year Capital Markets Assumptions. A key element of our projections is volatility for each asset class, in addition to the compound 10-year return. The volatility describes the range of potential outcomes for each year and over the 10-year horizon. For equity, we expressed our concern for high valuation in the U.S. market with a subdued return projection, 3% per year lower than the long-term average, and our concern for increased volatility coming off the run-up in equity over the past two years with a projected risk (standard deviation) that is higher than the long-term average. For total portfolios, we believe we capture the range of potential outcomes, which includes the impact of periodic market drawdowns. We and our clients use our CMAs to help set expectations that align with their return requirements and risk tolerance. The range of potential outcomes allows investors to “pre-experience” potential adverse outcomes and align the portfolio with their tolerance for risk. What we have experienced thus far in 2025, which have been market moves based on speculation of what will happen, is within our ranges of return and risk expectations.

Third, the markets have behaved pretty much how we would expect them to behave in the face of such uncertainty. While Treasuries sold off the second week of April, stocks were up that week. Stocks fell sharply the week before, while bonds held steady. The stock market is down 8.5% YTD, yet bonds are up 1%—bond’s role as the safe asset remains in place, and the diversification benefit of stocks to bonds is clear. We must refrain from hubris when trying to get our arms around policy changes that are largely yet to be implemented. The visibility on how this process unfolds is very low. The markets are working as expected thus far.

Rest assured Callan is watching how the tariff process unfolds and will examine the impact on the markets and assess our outlook as implementation and the potential impacts are revealed.