March Market Commentary

Market Update: Market Sell-Off on U.S. Tariff Policy Change and Its Investment Implications

On April 2, 2025, the U.S. government announced a sweeping change to its trade policy: a new 10% baseline tariff on imports from nearly every country, with higher rates applied to select trading partners that run large trade surpluses with the U.S. This marks a sharp break from past trade practices and introduces new uncertainties into the global economy. Financial markets responded swiftly and sharply to the news, with volatility rising and equity markets declining throughout the week.

Market Reaction at a Glance

Selling intensified following China’s announcement of retaliatory tariffs. For the week ending April 4, all major U.S. indexes posted significant losses:

• Dow Jones Industrial Average: –7.5%
• S&P 500: –9.1%
• Nasdaq: –10.0%
• Russell 2000: –9.7%

Attached is a Q1 2025 Quarterly Market Review that summarizes first-quarter market results. Both the Nasdaq and the Russell 2000 have now entered bear market territory, each having declined more than 20% from their recent highs. (1)

Investor sentiment has deteriorated sharply, and that shift is reflected in the VIX volatility index—commonly known as the “fear gauge.” The VIX, which measures expected volatility in the S&P 500 over the next 30 days, spiked to 45.31 on Friday. This reading is significantly above the long-term average of 19.37 but remains below historical peaks. The highest VIX reading on record, 82.69, occurred during the early stages of the COVID-19 pandemic, while the second highest, just under 70, came during the global financial crisis in late 2008.

Understanding the Nature of This Shock

It’s important to recognize the nature of this disruption. In contrast to the early days of the pandemic, when global uncertainty surrounded the global health crisis, or the structural instability of the 2008 financial crisis, when major banks on the verge of collapse had to be bailed out, this current shock is policy-driven. That distinction matters. Policy decisions, while impactful, remain within the scope of human control and are subject to course correction, negotiation, and adaptation over time.

This appears to be the early stage of a broader policy shift, part of a strategic effort to reduce U.S. dependence on foreign goods, support domestic manufacturing, and rebalance the trade deficit. Early reactions from global trading partners have been mixed.  China has retaliated, while other countries have indicated a willingness to engage in dialogue and explore more reciprocal trade terms. It is very early in the process, and the long-term impact of these policy changes will depend on how international and domestic conversations evolve.

In addition to tariffs, proposed cuts to federal spending are contributing to a sense of economic transition. Together, these developments create uncertainty and have raised the probability of a near-term economic slowdown.

The market reaction suggests investor concerns are shifting from inflation to weakening growth and demand. Falling oil prices, lower interest rates, underperformance in economically sensitive sectors, and expected downward revisions to earnings forecasts support this view.

The Fed remains cautious, but recent comments from Chair Powell suggest a wait-and-see stance on inflation risks. On Friday, April 4, he noted:

“Looking ahead, higher tariffs will be working their way through our economy and are likely to raise inflation in coming quarters. We are well positioned to wait for greater clarity before considering any adjustments to our policy stance.”

The Fed remains cautious, but if economic conditions deteriorate faster than expected, it may be forced to pivot to cut rates more aggressively than currently forecast.

Short-Term vs. Long-Term Implications

While it’s natural for personal perspectives to influence how these developments are interpreted, it’s important to keep the focus on their economic and investment implications. Regardless of one’s perspective on tariffs or fiscal policy, the near-term outcome is likely slower growth. That, more than inflation, appears to be the market’s concern.

At this point, the risk of stagflation—simultaneous high inflation and low growth—appears low. A more likely scenario is a mild recession or period of sub-trend growth with moderate inflation or disinflation.

In following the debate among market thought leaders, it’s clear that opinions remain deeply divided. Here are two viewpoints for your consideration:

• In a recent CNBC appearance, Jeremy Siegel referred to Trump’s tariffs as “the biggest policy mistake in 95 years,” arguing that tariffs and spending cuts could stifle growth and force the Fed to cut rates. Regardless, Siegel advises staying in the market if you are a longtime investor.
• On the other side, Kyle Bass has stated that tariffs, while painful in the short term, could reduce the federal deficit and better position the U.S. for long-term prosperity.

Both views carry merit and highlight the trade-off between short-term disruption and long-term structural adjustment.

What Investors Should Focus On

In the weeks and months ahead, we’ll watch how trade negotiations develop and how the Fed responds to changing economic signals.  As we evaluate this evolving landscape, the key takeaway for investors is not to overreact to headlines or short-term volatility. Instead, revisit your financial plan and ensure that allocations are aligned with your risk tolerance and long-term goals. History has shown that markets are resilient, but preparation and perspective matter.

The current market pullback is a potent reminder of the importance of diversification, which helps reduce overall risk and cushions against the full impact of market volatility. The chart below illustrates the impact of diversification on our moderate growth portfolio compared to index funds that mirror the major indices. Diversified portfolios are designed to weather downturns, and staying invested is often the best course of action.

This summer, we’re excited to launch a special educational series designed for our clients’ adult children and grandchildren, specifically those in the early to mid-stages of their careers (ages 22–40). The series will focus on the foundations of smart financial planning and cover key topics like budgeting, saving, home affordability, investing, and understanding employer benefits. Participants will also gain access to live webinars, office hours with an advisor, a personal financial management website, and a personal financial consultation. It’s a valuable opportunity to help the next generation build financial confidence and make informed decisions as they navigate life and career milestones.

Your portfolio reports are available in your eMoney vault. We are reaching out to clients to schedule reviews. If you have questions or would like to revisit any part of your plan, we’re here to talk, listen, and help you confidently move forward. We appreciate the trust and confidence you’ve placed in us.

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1. The Dow, NASDAQ, S&P 500, and Russell 2000 – are unmanaged groups of securities considered to be representative of the stock market in general