We summarized our November “Election Uncertainty is Over, but What Now?” blog by writing “election uncertainty is over but now we have policy uncertainty.” Boy, was that an understatement! Fifty-some days into Trump’s new presidency, we are surrounded by headlines, many of which are making people and the stock market uncomfortable.
Let us recall that January 2025 was an extremely strong month for the stock market, with the MSCI ACWI posting a 3.4% return. But that all changed in February. Instead of continuing to shrug off everything going on in Washington, the market became enamored with “Policy Fog” and how tariffs and other changes can be a shock to economic growth. As such, growth stocks have been hit pretty hard, with the Nasdaq officially in “correction” territory (down over 10% from their high) at the time of this writing.
Instead of an economy getting a boost from an administration bent on tax cuts and regulatory rollbacks, we hear some real economic concerns. Tariffs and mass deportations may cause inflation to rear back its ugly head seemingly right after we just put that genie back in its bottle. Moreover, it’s difficult for the Fed to help with any action as they will need clarity before making a rate change. The good news is that if the tariffs stick, it’s really just a 2025 one-time price change and not ongoing. More on tariffs can be found in this earlier blog.
But it’s not all about “Policy Fog”. As we’ve been reminding our clients for a long while now, the valuations for the overall stock market have been at quite elevated/expensive levels. Some will say that may be warranted because of AI, better profit margins, or whatever – but at the end of the day, the overall stock market was/still is expensive when compared to history. Not that every stock in the market is expensive, but many are. And when that happens, one usually sees rotation. Which is happening now. The “risk-on” environment has changed to “risk-off”. And of course, a major unwinding of the momentum trade – case in point: all Magnificent 7 stocks, the “stock darlings” of yesteryear, are in the “red” on the year.
Most investors don’t like it when stocks go down, but many times it’s a healthy and necessary exercise for the long-term. Pullbacks like this are normal, with an average intra-year decline of 14% over the last few decades! After a couple of strong years with minimal volatility, it can be easy to forget what can be learned by history. Yes, it’s times like these when investors can get swayed by their emotions. But that’s how the emotion cycle works…
For many, we’re now somewhere between anxiety and fear. But you don’t need to panic. It’s okay. We’ve been there before, and the stock market has EVERY TIME come back and achieved new heights! Timing the market is a fool’s game. Time in the market is what is important. As a long-term investor, stay disciplined and you’ll be rewarded for riding out the cycle.
Further, another item that may have gone unnoticed over the last month is that asset class diversification has been hugely beneficial so far in 2025! Yes, stocks have sold off, but bonds and many alternatives (like gold) have done well during this turbulent time. Even within stocks, international stocks have enjoyed a period of strong outperformance over the US, another sign of how diversification can smooth out the ride for you.
In summary, the country is going through some policy changes which Trump even admitted would result in a period of transition and didn’t rule out a recession. Not counting the short-lived one from the pandemic, we really haven’t experienced a recession in about 16 years. It can happen. The economy can and will contract every once in a while. And when you have tariffs and other policy changes this significant, it’s going to lead to major uncertainty – uncertainty for business leaders, uncertainty for workers, uncertainty for investors, uncertainty for you-name-it… But the US is not going away. And the stock market, like it always does, will eventually see new record highs. Very easy in this world of smartphones and social media to get bombarded by voices, many of which have endless negativity and opinions. Every day will bring millions of new bad news stories trying to grab eyeballs. Take it with a grain of salt and keep the emotions in check – in the long term, the rational you will thank yourself.