Uncertainty and Markets
The Trump administration has dusted off the 100-year-old playbook on implementing tariffs to achieve policy objectives, reminding us that trade wars are very much still alive. In President Trump’s last term, tariffs were primarily used to strike better trade deals with partners (such as the USMCA – US, Mexico-Canada-Agreement), and to keep China in check to curb the theft of American intellectual property. The newly proposed tariffs increase the average duty above the previous peak of 1930.[1]
While some deal making leverage is likely afoot here, President Trump also intends to share the burden of border security, increase domestic manufacturing, and generate revenue to help offset the costly planned extension of the 2017 tax cuts. This may bode for a longer duration for tariffs. Higher prices from tariffs are often passed along to consumers and can impair business decisions and investment. If inflation trends higher, interest rates could remain high, curbing investment and borrowing further. Consumers will see higher prices and restrict spending. The broader long-term impact is a slowing economy, higher prices, and a continued environment of uncertainty.[2]
Stock markets constantly seek equilibrium over time. There are multiple variables at play such as corporate earnings and profitability, interest rate levels, inflation and taxes, which create a dynamic environment in the search for balance. These factors, along with supply and demand, coalesce to form the invisible hand that guides prices on securities.
Right now, as discussed above, several of these factors are in flux with an opaque outlook. This uncertainty is creating the capitulation we’re seeing in the markets, akin to a child throwing a temper tantrum. While emotions may compel a parent to quiet the child, anyone who has tried to do so understands this is a fool’s errand. Instead, the tantrum often has to run its course, and the child afforded a safe space to emote. This advice is well heeded in its applications to the markets as well. In time, the market will move back to a balanced state once there is more clarity on the horizon. But what do we do while we wait?
1. Align our expectations with increased market volatility
2. Have a liquidity plan
3. Stay on the lookout for opportunities
We should begin by expecting volatility in this time of uncertainty. Times like this remind us that stocks are 20-year investments, and bonds and cash are best suited for shorter term needs. With this backdrop, we can begin to prepare for navigating choppy markets.
I always consider recessions “liquidity events”. If you plan accordingly, recessions don’t impact your ability to maintain your spending or lifestyle. Determining where liquidity will come from before a pullback in the markets helps avoid costly investment mistakes, such as selling assets that have lost value. If you create a liquidity plan, you can bridge the gap from when stocks drop to their eventual recovery.
If market volatility is expected and you have your liquidity plan in place, you can also be on the lookout for opportunities as share prices drop.
Market Recap and Outlook
Last year was a year of domestic outperformance fueled by growth stocks, specifically those that have become known as the Magnificent 7 (AAPL, AMZN, GOOG + GOOGL, META, MSFT, NVDA and TSLA). These 7 companies together accounted for more than half of the index’s total return.[3] For the calendar year 2024, the S&P 500 returned 25% with growth stocks providing a 35.9% return and value stocks providing a 12.3% return.[4] International developed stocks and emerging markets returned 4.3% and 8.1% respectively (in US dollar terms).[5] The Bloomberg US Aggregate bond index returned 1.25%.
Conversely, through March 31st 2025, US stocks as measured by the S&P 500 were down -4.27% with growth stocks providing a -8.37% return and value stocks providing a 0.28% return. [6] International developed and emerging markets stocks were up 7.01% and 3.01% respectively (in US dollar terms).[7] The Bloomberg US Aggregate bond index was up 2.78%7 and yields remain well above their 10 year average, with forward 5 year annual return estimates of 4.70%.
This reversal of performance towards value-oriented stocks, more fairly-valued international stocks, and bonds reflects a change in market sentiment towards a more defensive posture.
The tariff announcement on “Liberation Day” was more extensive than Wall Street expected, leading to more equity market downside. While equities have continued to capitulate (the S&P 500 index is down 17+% from it’s peak earlier this year), bonds have continued to provide ballast, increasing gains from 2.78% at the end of March to 3.58% as of April 3rd.5 Diversification is still working across asset classes even though equities are suffering in the short term.
Perspective
We will continue to experience increased market volatility and growth headwinds near term, but the stock market capitulation will not last forever. The risk of slow growth and inflation is not to be taken lightly. However, there are reasons to believe things will calm down in the markets.
We’ve begun this journey with a relatively healthy economy. The labor market has been stable, with job gains having significantly outperformed expectations for March (228,000 versus 130,000) and an unemployment rate of 4.2%.[8] Following the historic rate hikes of 2022, interest rates are still at levels where there is adequate room to cut rates and offer support to an economy that begins to falter more significantly. Further, it’s likely provisions from the Tax Cuts and Jobs Act of 2017 will be extended near term, assuming policymakers can find funding. President Trump has also made campaign promises to further cut the corporate tax from 21% to 15% and potentially eliminate taxes on tips and Social Security benefits.[9] These moves (while admittedly costly to our nation) could be broadly stimulative and help stabilize the economy while the tariff outcomes (which ideally become bilaterally negotiated agreements) become clearer.
Sometimes it’s hard to see the forest for the trees and it’s easy to lose perspective. Below is a table outlining some of the major drawdowns in U.S. stock market history, followed by subsequent returns. We’ve been through some difficult times in history and across those times the U.S. stock market has recovered from the bottom, on average, within two years. Whether it takes two years or more, the recovery will come. In the interim, let’s stay diversified, plan to spend capital wisely, and if we can keep our heads and summon intestinal fortitude, add to stocks while they’re on sale.
[1] https://www.wsj.com/economy/trump-economic-vision-tariff-manufacturing-262180a4?st=vcQV49
[2] https://www.linkedin.com/pulse/growth-drag-from-policy-uncertainty-david-kelly-gakfe/
[3] https://am.jpmorgan.com/content/dam/jpm-am-aem/americas/us/en/insights/market-insights/guide-to-the-markets/daily/protected/mi-daily-gtm-us.pdf
[4] https://www.rbcwealthmanagement.com/en-us/insights/us-equity-returns-in-2024-premium-performance
[5] https://am.jpmorgan.com/content/dam/jpm-am-aem/americas/us/en/insights/market-insights/guide-to-the-markets/daily/protected/mi-daily-gtm-us.pdf
[6] S&P Global, https://www.spglobal.com/spdji/en/index-family/equity/us-equity/#overview
[7] Y Charts, performance through 03/31/2025
[8] https://www.cnn.com/2025/04/04/economy/us-jobs-report-march-2025/index.html#:~:text=The%20US%20economy%20added%20a,and%20unemployment%20rise%2C%20she%20said.
[9] https://www.reuters.com/world/us/whats-us-senate-budget-advance-trumps-tax-cuts-2025-04-04/