2025 in Full Swing – Volatility Has Arrived
So far, 2025 has been off to a rocky start with market downside accelerating in recent trading dates.
From the peaks in February, the S&P 500 alone is down about 17.5%. Tariffs took the spotlight and overshadowed an otherwise positive jobs report on Friday, April 3rd that the U.S. added “228,000 jobs in March…well above the gain of 140,000 jobs economists polled by The Wall Street Journal had expected to see” (Source: WSJ). Small-cap U.S. stocks have fared the worst in the recent market sell-off, and growth companies have also underperformed value companies.
While the recent market declines have dramatically impacted U.S. companies, international stocks are enjoying their day in the sun – remaining positive year-to-date (at quarter-end) across both broad-based developed economies and emerging markets.
Fixed income is also a shining star – it’s been a while since returns for the quarter were positive for short-term, intermediate/aggregate, and global bonds.
People are seldom concerned with volatility on the upside, so when volatility makes headlines, it is usually a result of a spike in uncertainty. And, the markets dislike uncertainty. Not that all things can be priced into the markets at all times anyways, but when you break down what uncertainty really means – it is clearer how and why markets react how they do in the short term. The most obvious source of uncertainty at present are tariffs and potential all-out-tariff wars as other countries grapple with responses and countermeasures. Breaking it down to the company and individual level, without knowing what goods are going to cost, how/when they will be sourced, and ultimately how much of that can be absorbed through higher costs (both over the short term and long term) to the consumer, it is no wonder markets and corporate revenue and profit margins are under pressure.
But, the U.S. is quite resilient – having adapted to countless innovative technologies, disruptive natural disasters (North Carolina dealing with unprecedented flooding, L.A. suffering such devastation in January and beyond), recessions and global conflicts. So much of how we adapt over time is marked by the events of what happens, but where we end up is more about what we DO to build back, better, and how we support our fellow citizens through a combination of financial support and community support.
Wishing you calm in an otherwise stressful market environment. Read on as we discuss tariffs, inflation, and the benefits of diversification.
Uncertainty and tariffs
An extensive review of tariffs is beyond the scope of this Money Talk, plus the nature of the current tariffs are quite unprecedented given that it is unclear how much of the current administration’s plan may be a combination of negotiation tactics or what may remain for years to come – with varying implications for both. But, with the past as a moderate guide to how things have transpired, tariffs often are a one time adjustment to pricing and the new status quo from which companies / people can recalibrate. The jury is out on how successful the protectionist measures may be since there are significantly different implications of whether prices across the Pacific and Atlantic simply adjust or to the extent companies shift manufacturing operations back to the U.S. Talk about supply chain logistics being reconfigured! That process usually takes years and upwards of a decade or more – think how long it took to “outsource” to foreign countries in the first place – since it involves an intersection of investment dollars, building/modifying/creating facilities and infrastructure plus ensuring the workforce is not only capable, but willing, to occupy those jobs. None of which happen over night.
Market declines are never easy when you’re going through them. They are quite jarring, but this is not the first time, nor the last, that something large and disruptive will impact the markets. The key on whether it can have a permanent, lasting impact to your personal finances and goals often boils down to how you respond to these events in real time. It reminds me of Warren Buffett’s quote “only when the tide goes out do you discover who’s been swimming naked.” The foundation to evaluating what action, if any, to consider is having a solid plan in place from which you can reassess and recalibrate. Are your emergency reserves for an income or job interruption, capital needed for business expenditures or interruptions, tax reserves, and any short term goals adequately funded? Is there room for slightly adjusting course to be active buyers in an environment like this?
The choice to be an active seller in market corrections seldom creates long term value. Certainly, it can lead to temporary value retained if markets deteriorate further, but being an active seller means also properly timing when to get back into the markets – something that is exceptionally rare to replicate over time since the markets can be very humbling when they shift swiftly. In the depths of the COVID lows in March 2020, few people expected the drop to happen so quickly and even fewer expected the markets to recover so quickly. Hindsight is 20/20, but reflecting back on the events of the last significant market decline, a month into the recovery in April 2020, most pundits suggested that the worst had yet to come, and there was lots of discussion on whether the market would look like a “V” (quick decline followed by a quick recovery), a “ W” with a double dip, and “L” with extended, slow recovery. Few people expected a “V” shaped recovery, but lo and behold, that’s what the markets delivered.
Diversification is back!
Well, to be clear, the concept and purpose of diversification never went away, but having a properly diversified portfolio was challenged over the last decade when mega-cap U.S. technology companies could do no wrong and were carrying the markets. We believe in a diversified approach to wealth creation and retention, and times like these are ever more important to keep that theme. For the first time in what seems like a lost memory of times past, diversification is helping. Up until March 31, large-cap U.S. value stocks were still slightly positive for the year while large-cap U.S. growth stocks were down 8.6% (as measured by the S&P 500 Value and S&P 500 Growth, respectively). With the recent sell-off, that differential remains where value stocks are down 9.2% through April 4th, and growth stocks are down 17.5%. Global stock markets are modestly negative at down 1.8% for the year.
Many cryptocurrencies are down as well with Bitcoin seeing declines of about 11% year-to-date. Investment dynamics constantly evolve, and it would be imprudent to expect relationships of the past to remain static going forward, but so far the larger of the cryptocurrencies have not staved off a sell-off in the more broadly declining stock market. Often in times of distress, correlations among assets increase! Can/will (should?) it protect against a declining dollar or spike in inflation? Time will tell.
It’s true, evaluating how things react relative to one another is important to look at in the short term, but those relationships can (and do) break down if there is a flight to quality as people shift preferences to cash and government securities. But, it’s still to be determined if some of these relationships may hold up over the long term.
What is working this time that was different than in 2022 with the double digit declines that investors saw in both broad-based fixed income and equities is that interest rates at least are reasonably stable. A few years ago, fixed income had little protection in a broader stock correction (typically defined as a drop of 10% from a previous peak) since interest rates increased rapidly from a world of 0% to 4-5% seemingly over night. At this point in time, it’s possible interest rates could remain higher for longer if inflation pressures from tariffs and global geopolitical conflict put pressure on prices across global markets, but the general trend expectations for interest rates are looking toward steady declines over the coming years. Now, any of those relationships or expectations can change in the short term, but a broader decline in rates can be accretive to current fixed income holders. And, if we march toward a recession, a general cut in rates is typically expected – another factor supporting fixed income valuations – since many economists and investment analysts expect interest rates to possibly decline later this year.
But, it is important to recognize you cannot try and “hide” in assets that are illiquid that otherwise can (and do) have the same fundamental impact from the broader economy, tariffs, etc. but instead, build out an array of strategies to call upon in different cycles. What business isn’t impacted by interest rates from either a pricing perspective, valuation perspective, or how it means consumers shift their preferences? Ultimately, diversification is about pairing goals and resources with the proper timelines for the strategies utilized and keeping leverage and debt levels in check to prevent being backed into a corner and selling at temporarily depressed levels and eliminating the ability to actually RECOVER on the other side.
CLOSING REMARKS
While those in the recession camp have begun to increase expectations for a higher likelihood of such an event, it’s not unrealistic to expect a recession at some point – since, the longer we navigate without a recession, typically the higher chance one could be on the horizon anyways given that recessions have historically occurred about every five years. Recessions have historically been a normal part of the overall markets and the ebb and flow that the path takes over time. It is an important reminder that generally, the worst of the economic news, and the recession itself typically occurs AFTER the markets have reached a floor and recalibrated. Typically, the recovery is strongly underway by the time the worst of that economic news is actually being reported since most of those measures are backward looking on what HAS happened whereas the markets are forward-looking instruments for where things are headed, not just this year but in the 5 – 10+ years ahead.
We don’t often quote kids movies, but one that resonates from Moana 2 that does happen to have some good application to the current environment is “There is always another way to get where you need to go…what are you going to do?” We often get stuck in what we can see in front of us or predict as something that will happen, but what actually drives the markets is seldom something in plain sight. There are always twists and turns along the way, and the most important thing as it relates to finding financial security and success is having enough tools in your toolkit that enhance adaptability and resilience to your long term plan. You never know when a particular tool may be needed, but by planning ahead to have the options available it can dramatically prevent you from having to be a forced seller when times change and the tool can be the difference on possibly being an opportunistic buyer in times of market distress.
Investing takes patience and a significant amount of discipline to know that all the answers are in fact unknowable and to trust in the process of wealth creation over the long haul. It’s usually the overconfidence on one singular scenario happening that causes plans to go awry when markets swiftly and humbly change course. So, building enough contingencies for “what could go wrong” is the core to any long term plan. But, history shows that it is generally not a good strategy to bet against the U.S.’s ability to find solid footing and grow out of any turmoil to be better on the other side.
As always, if you have any shift in your goals or want to explore how, if, or what is appropriate to do in your unique situation, then please consult your Client Advisor to explore what you can to do be patient yet proactive in an environment like this and not succumb to (sometimes destructive) reactionary decisions.