We came into 2025 expecting a pickup in market volatility. It has not taken long for those expectations to be met, and then some. As we feared it would, the combination of optimistic businesses and consumers with equity and credit markets priced for perfection proved to be combustible when policy uncertainty was added to the mix.

The primary cause of the market selloff this year has been the uncertainty around – and then confirmation of – major changes to U.S. trade policy. The Trump administration has now laid out plans to administer tariffs (taxes on imports) totaling roughly $600 billion per year, or 2% of annual U.S. GDP. This constitutes the largest tax increase in modern U.S. history, more than all corporate taxes collected in a given year.

While these tariffs may generate proceeds that allow policymakers to cut other taxes at a later date, their effect on U.S. businesses and consumers will be felt immediately. A consumption tax can be disruptive for an economy whose output is driven nearly 70% by consumers, and tariffs’ regressive nature adds to the financial stress of tens of millions of households. And, as we pointed out back in December, there were already signs before a single tariff was levied that the U.S. economy was slowing heading into the year.

Market volatility and economic uncertainty understandably make investors anxious, but they should not lead to paralysis. We believe those sitting on large cash positions waiting for the right time to invest should have a plan to do so and continue to execute it. History shows that investors who buy into risk assets on the most volatile days rarely regret doing so with the benefit of just a year or two of hindsight. We are less confident that markets are set up for a V-shaped recovery in the very near term, although we acknowledge the potential of a quick reversal in the policies contributing to the market turmoil if the pain becomes too much. Fast action by policymakers could lead to a faster and fuller market recovery, but a further plunge in stock prices and interest rates from here is also a very real possibility.

Those fully invested should know that our approach to building well-diversified portfolios works in real-time. Our emphasis on Quality as an investment factor has contributed to the relative outperformance of our strategies during several recent market downturns when markets tend to punish unprofitable companies with significant leverage. Our belief that high-quality bonds provide a needed ballast against a weaker macroeconomic picture is showing results, with interest rates down sharply on equity market volatility and bad economic news. And our careful approach to identifying private investments that have little to no correlation to public markets is helping minimize the downside risk in our clients’ portfolios.

Historical performance suggests that periods of above-average returns and below-average volatility often give way to just the kind of turmoil we are seeing play out. Investors who maintained a disciplined approach and diversified their investments across uncorrelated assets have historically seen better outcomes during turbulent periods. We are ready to answer any questions our clients have about their investments and the broader outlook for markets.

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