Recent Market Volatility
3/15/2025
The S&P 500 closed at a new all-time high on February 19th. Since then, it has basically gone down in a straight line, falling approximately 10%, primarily due to concerns around tariffs and how they could impact economic growth and inflation. The Nasdaq index is down even more and the Russell 2000 is flirting with bear market territory, down nearly 20%. This is the biggest market drawdown since 2022, so it’s been a while since we’ve had to deal with a significant pullback. While it was nice to have a couple years without a significant pullback, it’s important to remember that isn’t normal. We’ve used the chart below before, but we feel the chart is a great reminder that volatility is a normal part of investing.
Since 1979, the average intra-year stock market decline is approximately 14%. Going back even further, since 1928:
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94% of years have drawdowns of 5% or worse
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64% of years have a drawdown of 10% or worse
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40% of years have a drawdown of 15% or worse
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26% of years have a drawdown of 20% or worse
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Most economists believe that tariffs will negatively impact gross domestic product (GDP), increase prices to consumers and therefore reduce personal consumption. Consumption drives approximately 70% of the US economy. Markets strongly dislike all this uncertainty and the uncertainty isn’t helped by the everchanging tariff announcements between the US and our three biggest trade partners in Canada, Mexico and China. The truth is, no one knows how this will play out. Are tariffs being used primarily as a negotiating tactic or will they lead to an all-out trade war? This is why corrections are so worrisome when you’re in the middle of them, no one knows how far things will go. Unfortunately, no one shouts out an all-clear signal when it’s over. Every correction looks healthy in hindsight and this one will likely be no different once we’re far enough away from it. We realize there are valid reasons for concern, but there are also reasons for optimism.
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History doesn’t always repeat, but it usually rhymes. The current environment is similar to 2018, when President Trump imposed new tariffs during his first term. That year, the S&P 500 experienced multiple market corrections, including a 12% pullback in January/February and an approximate 20% decline in Q4. It is worth remembering that the market reaction was relatively short-lived. Markets had returned to pre-tariff levels by May of 2019 and were higher by the end of 2019.
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Historically, when we have an environment of moderate U.S. economic growth, moderating inflation, the Fed not raising rates, and strong corporate earnings, US equities have generated good returns. All of those appear to be in place, at least for the time being.
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There is over $7 trillion currently sitting in money market assets that could be deployed by investors to buy stocks at lower prices and cheaper valuations if markets decline further. Money moving out of money market assets then into stocks could reduce downside potential.
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Bottom Line: If the trade war rhetoric continues in the coming weeks, we could be in store for more volatility as the uncertainty persists. Volatility is a normal, healthy, but still an unenjoyable part of the investing cycle. After going through an abnormal period of little volatility, the recent volatility should serve as a reminder of why we diversify and implement other strategies to attempt to minimize downside.
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As always, please reach out if you would like to discuss your accounts, your financial plan or the recent market activity in more detail.