6 minute read

Over the past week, we have seen significant equity market volatility, with the Standard & Poor’s 500 finishing lower on Friday by 3.1% alone and over 4.3% since a week ago, when the intra-day high was 5,852:

The downside has also continued over the past several weeks. After hitting a record high of 6,147 on February 19, 2025, the S&P 500 index is now almost lower by 9%:

What is Causing All This Equity Volatility?

In a nutshell, 3 things:

1. Increasing Odds of a Recession
2. Actual Effects of Trump Tariffs
3. Worries Over Trump Tariffs

Increasing Odds of a Recession

What has been merely feared by many market participants – that of a recession this year – is now even being openly acknowledged by President Trump that such a downturn can happen. The recession fears caused much of the market volatility last week, but new words from Trump yesterday have caused new stock market downward pressure today:

Asked in a “Sunday Morning Futures” interview on Fox News if he was expecting a recession this year, Trump replied: “I hate to predict things like that. There is a period of transition because what we’re doing is very big.” In the interview that aired Sunday, the president demurred when asked if there were reassurances he could provide to businesses seeking more clarity on tariffs.

Several prominent economists seem to share Trump’s sentiments*:

• JPMorgan Chase economists raised their risk of a recession this year to 40%, up from 30% at the start of the year. “We see a material risk that the U.S. falls into recession this year owing to extreme U.S. policies,” wrote a team led by Bruce Kasman.
• A team of Goldman Sachs economists led by Jan Hatzius on Friday said it was raising its 12-month recession probability to 20%, up from 15%. The bank noted that its forecast could rise further if the Trump administration remains “committed to its policies even in the face of much worse data.” The bank also left steady its forecast of two rate cuts this year.
• Economists at Morgan Stanley led by Michael Gapen lowered their economic growth forecasts last week and raised their inflation expectations, an unwelcome mix. The bank now expects real GDP growth of 1.5% in 2025 and 1.2% in 2026, down from previous estimates. It also expects the Federal Reserve’s preferred inflation gauge—the personal-consumption-expenditures price index—to rise 2.5% year-over-year in December. (For context: Headline PCE rose by 2.5% January.)

*Source: Wall Street Journal.

Actual Effects of Trump Tariffs

As noted in our most recent "Piece of the Puzzle," Trump has signaled many tariffs, which are driving fears of renewed inflation. Here are some of the major announcements made during the past month:

• February 1: Trump signed three executive orders, one each imposing tariffs on Canada, Mexico, and China. The 10 percent tariffs on all imports from China took effect on February 4, 2025. He subsequently provided a 30-day suspension for the tariffs on Canada and Mexico, which are scheduled to take effect March 4. (China subsequently announced a retaliation on about $21 Billion of U.S. exports at rates of 10% and 15% to take effect on February 10).
• February 10: Trump signed two proclamations expanding the Section 232 tariffs on steel and aluminum (the latter of which raised the tariff rate from 10% to 15%).
• February 14: Trump announced that he plans to impose tariffs on auto imports beginning on April 2. Four days after this announcement, Trump indicated that the rate on autos would be “in the neighborhood of 25 percent.”
• February 26: Trump announced a 25% tariff on imports from European Union (“E.U.”) during his first cabinet meeting of his current Presidency. Spurred on by the E.U. having a 10% tariff on passenger cars, four times the rate of U.S. passenger car tariff (at 2.5%). The E.U. does enact Value Added Taxes of 17.5%.

Worries Over Trump Tariffs

As worrying as the stated tariff policies are, markets are usually uneasy at the prospects of future uncertain policy. Stock market volatility is driven as much by the perception of future adverse events as well as actual adverse events that have already happened.

So What Can Investors Do?

First off, historically predicting the direction of stock markets in the short-term has been a fool’s game, and this time is likely to be no different. So in light of the volatility in the markets, what are the silver linings and what can investors do?

Three things come to mind:

1. Diversification
2. Lower Interest Rates
3. Remain Patient and Give Things the Power of Time

Diversification

Being diversified internationally by investing in non-U.S. stocks is a prudent measure, but particularly during times like these when adverse effects of events like tariffs might hurt domestic stocks more than non-U.S. stocks. It is important to point out that diversified portfolios have picked up the baton and provided progress. It is small pieces like emerging markets up 6% or big allocations like California Municipal bonds up 1% or US Treasury Bonds up a few percent but also international developed markets are up 9% this year.

So far in 2025, investing internationally has shown to be effective. In the chart below is a comparison between two index-based Exchange-Traded Funds. In blue is the MSCI All Country World Index ETF (Ticker: ACWI) and in red is the SPDR Standards & Poor’s 500 ETF (Ticker: SPY). As can be seen below, as of mid-day trading on 3/10/2025, while ACWI is lower by about 1%, SPY is lower by more than 4%. Allocating a portion of one’s portfolio to non-U.S. stocks would have helped to mitigate the effects of negative returns.

Also notable is that since the peak of both ACWI and SPY, the latter has fallen more on percentage terms, also providing more evidence of being invested in Non-U.S. stocks can reduce overall equity volatility.

Lower Interest Rates

A temporary lower stock market certainty gives the Federal Reserve more lateral flexibility to adjust the Federal Funds rate as well. If efforts to reduce government waste can save us money, keep the bond market’s confidence and lower our lowest productivity labor (Federal), it isn’t beyond the limits of the market’s imagination that the economic gyrations of the new administration could land us in a lower rate environment. If the economy has downshifted to a slower growth rate then the Fed can bring rates down faster. Lower rates would likely benefit the bonds, real estate and overall equity markets

Remain Patient and Give Things the Power of Time

Perhaps the best action one can take during market volatility is to take a deep breath and consider that stock markets have gone through many volatile times and have historically recovered – and then some.

Consider the chart below, which shows the growth from an initial investment of $10,000 at the beginning of 1970. A little over a half-century later that $10,000 grew to almost $3 Million, a growth of some 300-fold, which translates into an annualized return of almost 11% (including reinvestment of dividends):

Source: First Trust.

Moreover, seeing significant declines in the middle of a year is not only expected, but typical, including during years in which the stock market finished significantly higher. For instance, during the past two calendar years, U.S. Large-Cap stocks had 10% and 8% intra-year declines respectively, but both finished handsomely by adding nearly ¼ of one’s initial capital each year (including reinvestment of dividends).

Source: First Trust.

We sincerely thank you for your confidence and trust in us. Please do not hesitate to reach out to us if you have any questions or wish to discuss how all this relates to your specific financial situation in more depth.