On the previous post, we went over the concepts of gains and losses. Specifically, we discussed the required investment gains to recover portfolio losses. Over the past few weeks, we’ve witnessed significant market volatility, with the S&P 500 officially entering correction territory, down over 10% from its recent highs, and the broader U.S. stock market shedding approximately $5 trillion in value. Note that although a 10% market correction isn’t necessarily a cause for financial panic, it is nonetheless another warning sign of a very frothy capital markets.
Let’s break down the key drivers of this recent downturn. it’s important to note that only through this kind of insight do we truly understand the risks and opportunities, and therefore our strategy to manage financial turbulence.
So, what’s driving the latest downturn?
Escalating Trade Tensions
The re-ignition of global trade wars, particularly under the Trump administration’s aggressive tariff policies, has rattled investor confidence. Equity markets have been frothy for quite some time and perhaps this is the catalyst that brings about a much-needed correction. Inflationary pressures and supply chain disruptions are also starting to weigh in on investor sentiment. Note that although the extent of possible tariffs against US trading partners have yet to fully materialize, this is enough to cause short-term uncertainty which led to wild swings in equity prices.
Economic Uncertainty and Recession Fears
Financial analysts and institutions, including Goldman Sachs and JP Morgan Chase, have increased the likelihood of an economic downturn in the near future, citing the potential for tariffs to act as a “tax” on consumers and businesses. Combined with recent layoffs in both the public and private sectors, as well as a slowdown in consumer spending, these developments have fueled fears of a recession.
Tech Sector Struggles
The so-called “Magnificent Seven” tech stocks, which have been the primary drivers of market gains over the past two years, have underperformed significantly in 2025. For example, Nvidia, a darling of the AI boom, has dropped roughly 14% year-to-date, pulling the Nasdaq down 11% from its peak. This sector’s weakness has amplified the broader market’s decline, as investors question whether the high valuations of growth stocks can be sustained in an environment of rising interest rates and economic uncertainty.
Monetary Policy Expectations
The Federal Reserve is once again in the spotlight, with markets eagerly awaiting its next moves. Recent data suggests the Fed may begin cutting rates in June 2025, but the uncertainty surrounding tariff-driven inflation could complicate this timeline. Investors are grappling with the possibility of tighter financial conditions if the Fed delays rate cuts or, worse, is forced to raise rates to combat inflation.
Historical Context: Corrections Are Not Uncommon
While a 10% drop in the stock market can feel alarming, it’s important to put this correction into historical perspective. According to research, the S&P 500 experiences a correction of this magnitude approximately once a year on average. Since World War II, the average correction has seen a drawdown of about 14% and taken roughly five months to reach a bottom, followed by a four-month recovery. The current downturn, while swift, is not unprecedented.
Risks to Monitor
Now is a good a time as any to reassess one’s portfolio allocations. Although it is true that capital markets tend to rise in the long-run, it’s fraught with volatility along the way. Always remember that market do go up or down in a straight line. it’s critical to acknowledge the risks we face in the near term:
Prolonged Trade War: If the Trump administration follows through on its tariff threats for an extended period, the economic fallout could be severe, potentially tipping the U.S. into a recession. Analysts warn that consumer spending, which accounts for a significant portion of GDP, could weaken further as households feel the pinch of higher prices and diminished confidence. And recessions are never good for positive market returns.
Corporate Earnings Pressure: Tariffs, combined with tighter financial conditions, could squeeze corporate profit margins, particularly for companies with significant international exposure.
Geopolitical Instability: Beyond trade, broader geopolitical tensions—such as shifts in U.S. military commitments in Europe—could add another layer of uncertainty to global markets.
Opportunities in the Chaos
Despite these challenges, periods of market volatility often create opportunities for disciplined investors. Here are some areas we are closely monitoring:
Value Stocks: With growth stocks under pressure, value-oriented sectors such as financials, industrials, and consumer staples may offer attractive risk-reward profiles. These sectors are often less sensitive to tariff-related disruptions and could benefit from a rotation away from expensive tech stocks.
Defensive Positioning: We are exploring opportunities in defensive assets, such as high-quality dividend-paying stocks and sectors like utilities and healthcare, which tend to perform well during economic slowdowns.
International Diversification: While U.S. markets are grappling with tariff-related uncertainty, some international markets may offer relative stability or undervaluation. For example, Asia-focused hedge funds have reportedly outperformed their U.S. counterparts during this sell-off, highlighting the potential benefits of diversification.
Precious metals: Gold (and to some extent Silver) has seen it’s price rise. Gold is finally getting it’s due and has seen it’s price above $3,000 per ounce for the first time. Gold has been telling investors that something big is about to break and it’s been saying this for a while. Gold is anticipating that short term rates are about to fall because of market turmoil.
Cash and short-term treasuries: Investors at this time should also be focusing on having dry powder to invest in assets when they once again trade at attractive valuations. Investors can do this by investing in risk-free short term treasuries which still provides a respectable risk0-free yield above 4%.
Staying the Course with Tactical Adjustments
As always, our investment philosophy is rooted in discipline, diversification, and a long-term perspective. Here’s how we are navigating the current environment:
Maintaining Core Holdings: We believe in the resilience of well-diversified portfolios. While short-term volatility can be unsettling, history demonstrates that staying invested through corrections is often the best course of action.
Tactical Rebalancing: We are actively reviewing portfolios to ensure they are appropriately balanced given the shifting risk landscape. This may include reducing exposure to highly cyclical sectors (e.g., semiconductors) and increasing allocations to more defensive or undervalued areas.
Risk Management: We are closely monitoring market signals and economic data to identify potential inflection points. If recession risks escalate, we are prepared to take additional defensive measures, such as increasing cash allocations or hedging strategies.
Opportunistic Buying: Sharp declines in quality companies can create buying opportunities. We are building a watchlist of fundamentally strong businesses that have been unfairly punished in the sell-off, particularly in the tech sector, where long-term growth prospects remain intact.
Final Thoughts: Patience and Perspective
It’s natural to feel uneasy during market downturns, but it’s during these times that patience and perspective are most valuable. The current correction, while painful, is not a signal to abandon your long-term financial goals. Instead, it’s an opportunity to reassess, refine, and reinforce our strategy.
Until the next post, invest wisely, invest soundly, and invest boldly.
Disclaimer: This post is for informational purposes only and does not constitute investment advice. Past performance is not indicative of future results. Always consult with a financial advisor before making investment decisions.
