Market and economic volatility are both inevitable and often uncomfortable. Global financial markets have responded swiftly and sharply to President Trump’s recent announcement of tariffs on all imported goods. This sweeping shift in U.S. trade policy led the S&P 500 to its worst week since the early days of the pandemic lockdowns in 2020.
While no two market cycles are identical, our investment approach is built to navigate uncertainty thoughtfully and with long-term outcomes in mind. Below we provide some context behind recent market volatility along with potential implications for the economy and portfolios:
Why Is the Administration Doing This?
The goal is a structural reset of the economy, aiming primarily to rebuild domestic manufacturing by incentivizing domestic production, enforce fiscal discipline through smaller government and lower deficits and drive corporate and consumer activity to boost domestic economic growth.
This approach contrasts sharply with the global free trade model of the past several decades. The volatility in financial markets reflects a rapid resetting of expectations, including the potential for higher near-term inflation and slowing economic growth as we transition to this new trade regime.
What Does This Mean for the Economy and Markets?
The Administration’s aggressive opening actions to restructure trade flows increases the risk of a recession. If these tariffs remain in place, the U.S. may experience a “manufactured” downturn, similar to the Covid-19 lockdown-induced recession. And as tariffs directly increase costs, particularly in consumer electronics, apparel and footwear and automobile production, we could experience increasing inflation again in the near term.
We’ve all heard the phrase “markets don’t like uncertainty”. What markets like even less is being surprised. The scale of the tariffs took markets by surprise, which has led to the rapid and uncomfortable repricing of risk assets, as now markets have a whole new set of potential future outcomes (lower corporate earnings, higher inflation, slowing economic growth, and a Fed that is likely to maintain its restrictive monetary stance for longer) to contemplate.
Ultimately we are seeing that the core concepts discussed in our “2025 Economic Themes” are playing out early: a fragile market characterized by high valuations, high concentrations, and the persistent risk of rising inflation and policy uncertainty tilting the odds toward continued volatility. Additionally, with the increasing likelihood of simultaneously restrictive monetary and fiscal policy, coupled with tepid consumer spending, the probability of an economic slowdown has risen.
What Changes Should Be Made?
For clients whose portfolios we actively manage, we believe they are well positioned for volatility. In contrast to the uncertainty gripping the U.S., European equities have benefited from relative policy stability and slower headline-driven turbulence. Amid the pullback in equity markets, high-quality fixed income investments have held up well, reaffirming their importance in diversified portfolios as a buffer against bouts of volatility.
While we don’t believe any structural changes to asset allocations are currently warranted, we are actively monitoring developments and if new facts support a change, we will act. Until then, we believe staying the course remains the best approach. We will continue to maintain diversification and our rebalancing discipline to take advantage of short-term fluctuations.
Are You Sick of Hearing “Stay the Course”?
You’ve likely heard it many times before, and this won’t be the last time you hear it from us either. Volatility in financial markets is inevitable and part and parcel of the risk/return tradeoff we must accept when investing for the long term. This chart plots the 13 bear markets (in global stocks) since 1972 along with global stock prices:
(Source: Vanguard Advisor Services. Calculations as of December 31, 2024 using the MSCI World Index from January 1, 1972, through December 31, 1987, and the MSCI ACWI thereafter.)
Think of all the geopolitical events and uncertainty investors were faced with during this span of time (Iranian hostage crisis, Black Monday, dot-com bubble, September 11th, wars in Iraq and Afghanistan, the Euro debt crisis, Global Financial Crisis, Covid-19 pandemic, just to name a handful), but markets recovered and continued to grow. This current downturn is different from all those just named, but the underlying reality is that we’ve been here before, and markets are perpetually resilient.
There’s no question that volatility is challenging and can be distressing, but historically bull markets last longer and are much more robust than bear markets:
Global stock prices (January 1, 1980 through December 31, 2024)
(Source: Vanguard Advisor Services. Calculations as of December 31, 2024 using the MSCI World Index from January 1, 1980, through December 31, 1987, and the MSCI ACWI thereafter.)
While enduring these periods of heightened volatility may seem atypical at the moment, history suggests that maintaining discipline and staying focused on the long-term remains the most rewarding approach. In the meantime, we’ll be here for you every step of the way.
The views expressed represent an assessment of market conditions at a specific point in time, are opinions only and should not be relied upon as investment advice regarding investments, sectors or markets in general. The above statistics and/or commentary have been obtained from sources we believe are reliable, but we cannot guarantee their accuracy or completeness. Past performance is no guarantee of future results.
Specific securities discussed herein are illustrations and do not represent securities purchased, sold or recommended for client accounts. Such information does not constitute, and should not be construed as, a recommendation to buy or sell specific securities. This is not a complete analysis of every material fact regarding any company, industry, or economic condition. Due to shifting market conditions, all expressions of opinion are subject to change without notice.
The information contained in this document does not constitute the rendering of legal, accounting, or other professional advice or opinions on specific facts or matters. Before implementing any ideas suggested here, consult with your tax advisor regarding your specific tax situation.
Talk to your financial advisor before acting on information in this document.