Eyes On the Vibes
Summary
· Tariffs Stir the Pot: President Trump’s new 25% tariffs on Canada and Mexico, plus increased tariffs on China, aim to boost American jobs and revenue, though studies show U.S. consumers and businesses often bear the cost. Inflation expectations are rising, and consumer confidence is wobbling.
· Markets Echo History: The recent volatility, sparked by tariffs and reminiscent of 2018’s trade-war turbulence, has pulled major indexes down 5% to 10% and hit speculative assets like crypto and momentum-driven names such as Tesla hard.
· Diversification Shines Through the Noise: While U.S. large-caps tread water and small-caps lag post-election, international developed markets have climbed 4.21%, and the Bloomberg U.S. Aggregate Bond Index has gained 1.89%. This highlights the power of spreading your bets across assets and regions, turning uncertainty into a chance to thrive.
· Volatility Is Normal: Intra-year annual drawdowns have averaged 14.1% since 1980. This can feel unsettling, but the S&P 500’s 34 positive years out of 45 illustrate that risk can pay off over time. Building a diversified portfolio aligned with your goals and risk tolerance allows for the ability to capture returns without needing to guess the market’s next move.
We are in a challenging time, facing rapidly evolving information about President Trump’s executive orders and the effects on businesses and the overall economy at large. Markets continue to function and are reflecting this constant barrage of change, which likely means greater volatility. These circumstances make it especially difficult for investors to stay in their seats.
While we will cover the market reaction, the recent decline has much the same feel as past drawdowns, with fear, anxiety, and worry elevated in the moment. It always feels different this time, and scrolling through the news, it’s understandable to think the volatility is worse and longer lasting than anything that has come before.
So, let’s dive into what’s going on.
Tariffs
One concern for voters in the recent election was the commitment to fair trade and higher tariffs on China and other trading partners. As president, Trump has a lot of discretion to impose tariffs, and he thinks they’ll do a few things: raise revenue, discourage migration and drug trafficking, and bring back American manufacturing jobs.
Seems reasonable. But here’s the thing: tariffs are just taxes on imports. And the U.S. imports way more than it exports, so we have leverage over, say, Canada, Mexico, and China. That sounds like a winning proposition. Except, as it turns out, businesses don’t love taxes. And when you tax something, someone has to pay. Empirical studies suggest that “someone” is usually U.S. consumers and businesses.1 Companies, not being huge fans of weaker profits, tend to raise prices instead, so consumers get higher costs.
What has been the result of tariff related news so far? Well for one, consumers have noticed. Inflation expectations are at their highest level in years, confidence is slipping, and spending is slowing. All of this, by the way, is happening while inflation is still sitting above the Fed's 2% target.
Market Pulse
Donald Trump’s first year in office, 2017, saw the U.S. equity market power higher with almost no drawdowns and little volatility. Then, a trade war with China in 2018, coupled with rising interest rates put the market into a frenzy and an explosion of volatility occurred. This week has provided investors with a taste of 2018.
Initially, markets dismissed Trump’s tariff threats as mere campaign rhetoric, expecting delays to dilute their impact—and for a time, postponed deadlines reinforced that view. Yet, on March 3, 2025, President Trump imposed a 25% tariff on all imports from Canada and Mexico, while announcing plans to double the tariffs on China to 20%.
As new information reshapes expectations, markets adjust prices accordingly.
Source: YCharts. Nova R Wealth. Data from 1/1/2025 to 3/4/2025.
When things get shaky, the first stuff to go is usually the speculative, momentum-driven stocks and sectors. And right now, it kind of feels like we’ve hit that point—at least for the moment. A lot of the retail-favorite trades that have been soaring over the past few months are, well, not soaring anymore. Crypto? Ouch. Bitcoin’s down, and so is MicroStrategy, which is basically Bitcoin with extra leverage. Tesla? Also getting hit.
It’s not just the speculative names, though. The major indexes—the S&P 500, NASDAQ, and Russell 2000—are all off their highs by 5% to 10%. However, reviewing market performance in the full post-election period reveals some notable trends. U.S. large-cap stocks have been roughly flat to slightly negative, while U.S. small-cap stocks have underperformed. In contrast, international developed markets have broken the mold, rising 4.21%.
One area that has provided stability is investment-grade fixed income. The Bloomberg U.S. Aggregate Bond Index has returned 1.89% since the election, benefiting from falling yields as investors lower their expectations for U.S. economic growth. The key takeaway is that diversification across asset classes and geographic regions has finally reasserted its importance—this time, the winners are not just U.S. large-cap stocks or technology companies.
Source: Morningstar Direct. Nova R Wealth. January and February are 2025 monthly returns. Post-election returns are from 11/6/2024 to 3/4/2025. See important disclosures at the end of this material.
Unpleasant Times
Market uncertainty, bad vibes, and drawdowns aren’t any fun. They’re the worst—like a never ending stomachache that you’ve never encountered before. But, it’s important to remember that the stock market pulls this stunt virtually every year. U.S. stocks have averaged at least three 5% pullbacks annually, and since 1980, the average intra-year drawdown has been 14.1%. Remarkably, despite these setbacks, the S&P 500 has posted positive returns in 34 out of 45 years.
Source: FactSet, Standard & Poor’s, J.P. Morgan Asset Management. Returns are based on price index only and do not include dividends. Intra-year drops refers to the largest market drops from a peak to a trough during the year. For illustrative purposes only. Returns shown are calendar year returns from 1980 to 2024, over which time period the average annual return was 10.6%. Guide to the Markets – U.S. Data are as of February 28, 2025.
This underscores a key principle: the returns from risky assets compensate you for enduring uncertainty. Rather than attempting to predict market movements, the evidence supports building a diversified portfolio tailored to your time horizon, goals, liquidity needs, and risk tolerance—a strategy that prepares you for volatility instead of gambling on forecasts.
(1) Bloomberg Law. (n.d.). How U.S. tariffs work and who foots the bill: QuickTake. Retrieved March 5, 2025, from https://news.bloomberglaw.com/health-law-and-business/how-us-tariffs-work-and-who-foots-the-bill-quicktake-1
The S&P Global REIT Index measures the performance of publicly traded equity REITs listed in both developed and emerging markets. It is a member of the S&P Global Property Index Series.
The Bloomberg US Aggregate Bond TR Index measures the performance of investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS.
The Bloomberg US Corporate High Yield Index measures the USD-denominated, high yield, fixed-rate corporate bond market. Securities are classified as high yield if the middle rating of Moody’s, Fitch and S&P is Ba1/BB+/BB+ or below.
The S&P 500 Index is widely regarded as the best single gauge of the U.S. equities market. The index includes a representative sample of 500 leading companies in leading industries of the U.S. economy. The S&P 500 Index focuses on the large-cap segment of the market; however, since it includes a significant portion of the total value of the market, it also represents the market.
The S&P 500 Equal Weighted Index is the equal-weight version of the widely-used S&P 500. The index includes the same constituents as the capitalization weighted S&P 500, but each company in the S&P 500 EWI is allocated a fixed weight – or 0.2% of the index total at each quarterly rebalance.
The Russell 2000 Index measures the performance of the small-cap segment of the US equity universe. It is a subset of the Russell 3000 and includes approximately 2000 of the smallest securities based on a combination of their market cap and current index membership. Russell Investment Group is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Russell Investment Group.
The MSCI EAFE Index measures the performance of the large and mid cap segments of developed markets, excluding the US & Canada equity securities. It is free float-adjusted market-capitalization weighted.
The MSCI Emerging Markets Index is a free float-adjusted market capitalization index that is designed to measure equity market performance in the global emerging markets.
IMPORTANT DISCLAIMERS AND DISCLOSURES
This presentation is for educational and illustrative purposes only. It is not intended to offer or deliver investment advice in any way. Past performance is not indicative of future results. The information contained in this presentation has been gathered from sources we believe to be reliable, but we do not guarantee the accuracy or completeness of such information, and we assume no liability for damages resulting from or arising out of the use of such information. Any projections, market outlooks, or estimates are based upon certain assumptions and should not be construed as indicative of actual events that will occur. The performance numbers displayed herein may have been adversely or favorably impacted by events and economic conditions that will not prevail in the future. Any index presented does not incur management fees, transaction costs or other expenses associated with investable products. It is not possible to directly invest in an index.
Nova R Wealth, Inc. is a registered investment advisor with the U.S. Securities and Exchange Commission. SEC registration does not constitute an endorsement of the firm by the Commission, nor does it indicate that the adviser or investment adviser representative has attained a particular level of skill or ability. Nova R provides investment advisory and related services for clients nationally. This material is proprietary and may not be reproduced, transferred, or distributed in any form without prior written permission from Nova R Wealth, who reserves the right at any time and without notice to change, amend, or cease publication of the information contained herein.