The first several months of 2025 has delivered no shortage of market drama. On April 2, President Trump announced sweeping new tariffs effective almost immediately. These included a 10% across-the-board tariff, layered with “reciprocal” tariffs averaging 25% per country. Specific trading partners such as China, Canada, Mexico, and the European Union face even harsher measures. A 25% tariff on all imported automobiles went into effect without delay.
Markets responded with a sharp sell-off, inflation expectations surged, and interest rate forecasts flipped. For sophisticated investors, this is not a time to panic. It is a time to assess and profit with smart investing and planning.
Below are five key insights that can help you (and your clients) navigate this new environment with clarity and purpose.
1. Understand the tariff landscape and its policy intent
This administration has branded the move as a “Make America Wealthy Again” initiative grounded in tariff-driven revenue, economic fairness, and deficit reduction.
These policies are not new. In fact, they echo the 2018 playbook. The 2018 tariffs triggered initial volatility and disrupted global supply chains, yet markets recovered as businesses adapted and trade tensions eased. The S&P 500 ended that year relatively flat but posted strong gains in 2019. A similar pattern of short-term turbulence followed by mid-term normalization may emerge again. Tariffs first, market adjustment later. However, this iteration appears broader in scope and faster in implementation.
Pro tip: Clients with global exposure should assess their allocation in light of recent outperformance in international markets. While tariffs pose headline risk, some non-U.S. regions have shown relative strength and may offer portfolio ballast during U.S.-centric volatility. Seek to refine—not exit—global positioning based on sector and regional fundamentals.
2. Prepare for a more complex inflation and growth dynamic
Tariffs act as a tax on imported goods. They feed inflation and suppress demand. In this case, the Federal Reserve may find itself cornered. Raising interest rates to counteract tariff-induced inflation risks tightening already fragile financial conditions. Keeping rates steady may allow inflationary pressures to accelerate, undermining progress toward price stability. Fed Chair Jerome Powell acknowledged that the economic impact “is likely to be significantly larger than expected.”
Markets have now priced in a 68% chance of at least 100 basis points in rate cuts for 2025, up from 32% just a week earlier. Oil prices have also dropped to post-2021 lows on growth concerns.
Pro tip: Bonds have become a volatile asset class, like so many others. According to Goldman Sachs, maintain “dynamic” bond allocations to take advantage of the dislocations and opportunities, including credit spread products.
3. Recognize the sentiment shift and market correction pattern
Markets often react swiftly and sharply when policy announcements inject uncertainty. The S&P 500 declined 9.1% in the week following the April 2 tariff announcement. The Nasdaq Composite experienced an 11.4% two-day plunge—an extreme six-standard-deviation event that has occurred only 10 times since 1971. These historical precedents include the 1987 crash, the bursting of the dot-com bubble, the 2008 global financial crisis, and the early pandemic panic in March 2020.
Since 1980, in years when the market experienced a 10% correction, the S&P 500 still finished the year higher 57% of the time, delivering an average return of 17%. These corrections often serve as recalibrations—not endpoints.
The CBOE Volatility Index (VIX), Wall Street’s primary fear gauge, has surged to 45.3—three standard deviations above its long-run mean. This level of volatility suggests extreme uncertainty, not just discomfort. It reflects a “sell first, ask questions later” mindset driven by institutional risk models, not fundamentals. A policy shift is causing this volatility, and history shows that a policy shift will go a long way in resolving the current issues.
Importantly, this market correction followed back-to-back years of strong performance. From the October 2022 lows to the February 2025 peak, the S&P 500 rallied more than 70%, fueled by easing monetary policy, resilient earnings, and surging investor optimism. That optimism has now turned sharply, but this transition may present opportunity rather than danger.
Low consumer sentiment often correlates with future market strength. According to J.P. Morgan, the average 12-month return following major sentiment troughs is 24.1%, compared to just 3.9% after peaks.
For example, following deep lows in March 2003, March 2009, and April 2020, the S&P 500 surged by 32.8%, 22.2%, and 43.6%, respectively. The current sentiment reading—57.0 as of March 2025—sits significantly below the long-term average of 84.4. This level historically signals pessimism has peaked, often paving the way for recovery.
Pro tip: Use extreme sentiment readings to your advantage. Panic often creates opportunity. For long-term investors, this may represent a classic dislocation worth studying, not fleeing.
4. Focus on sector and regional dislocations
Technology and consumer discretionary stocks led the decline, falling sharply in Q1. Chinese equities listed in the U.S. dropped 8.9% in one day. However, nine sectors had been outperforming the broader index before tariffs landed. International markets like Europe and Africa rose 12% and 13%, respectively, in Q1.
Global currencies also shifted. Developed-market currencies gained against the dollar, while emerging-market currencies weakened. Sectors with high international revenue—information technology, materials, communication services, consumer staples, and energy—are now under pressure.
Pro tip: Reassess your sector allocations. Overweight U.S. tech may no longer be the optimal call. There may be a window to rotate toward sectors or regions with stronger local fundamentals or less tariff exposure.
5. Watch for recovery catalysts and policy offsets
Markets dislike uncertainty more than they dislike bad news. The administration has hinted at further deregulatory and tax policy offsets. The upcoming earnings season will be critical. Positive outlooks from corporate America could mark the beginning of a rebound.
Other potential catalysts include a confirmed economic soft landing, stabilization in trade relationships, and adaptive business models that thrive despite headwinds. Sentiment remains extremely negative, and many sellers may have already exited, laying the foundation for a possible bottom.
And remember, it is time in the market, not timing. Over five-year rolling periods since 1950, a 60/40 portfolio is never negative.
Pro tip: Stay tactical but disciplined. Market recoveries often begin when pessimism peaks. Stay invested and develop a re-entry plan for risk assets. Avoid emotional overcorrections.
Navigating market volatility: An advisor’s action plan
As advisors, it’s important to have a plan in place to act quickly in periods of market volatility. It’s a good idea to build a “Down Market Action Plan” that captures all of the client communication and planning strategies you plan to carry out in times like these. Here are a few ideas that you can adapt to move decisively when faced with a down market:
1. Client announcements/webinars: When clients hear from their advisor, it helps to put them at ease. This could be an emailed letter, a market update video, or a more comprehensive webinar presentation.
Click the picture below to watch a recent short video we shared with clients:
2. Personalized outreach: For those clients who tend to be especially nervous in adverse market conditions, consider keeping a list of those clients for individual outreach. A phone call or a personal email can go a long way in addressing their concerns.
3. Tax planning and Roth conversions: The best time to do tax planning is during a market downturn. Especially for Roth conversions, consider converting a portion of the total recommended amount. The benefit is that when the market rebounds, the growth will be captured in the Roth IRA. For clients who contribute to IRAs, consider making and investing those contributions now.
4. Invest cash in the market: For clients with large cash holdings or who are dollar-cost-averaging cash into their investment portfolio, consider increasing the frequency of purchases and buying while the market is depressed.
5. Tax-loss trading: After two years of strong market performance, many client portfolios have not had losses to realize. While the market overall and specific industries and companies have been hit especially hard, consider realizing any available losses. Be careful to abide by the wash sale rules, so set calendar reminders for repurchasing holdings sold at a loss.
6. Rebalance portfolios: For those who use standardized models for their client portfolios, now might be an opportunity to rebalance and reestablish your outlook and strategies.
7. Update financial plans: Demonstrate to clients that their situation is not as dire as they believe.
Final thoughts
These types of macro shocks create volatility. But they also clarify risk, reshape expectations, and reset valuations (which is a good thing 😉). Sophisticated investors should not view this environment as a time to retreat. Rather, it is a period to refine strategy, reassess risk tolerance, and lean into thoughtful portfolio construction.