March Madness

March may be the month where the clocks and the seasons spring forward, but equity markets are falling back. U.S. and global markets are under pressure as trade tensions escalate and recession fears intensify, triggering a sharp sell-off across major indices. Investors are growing increasingly concerned over the economic impact of recent policy decisions and geopolitical developments, leading to heightened volatility.

Chart 1, 0:42— As of filming, the S&P 500 is off about 5.5% to 6% year to date. Interestingly, on Tuesday the 11th, the intraday low brought the S&P 500 right to the correction level of -10% from its February 19th high before recovering.

I bring up this familiar chart to remind us that volatility is normal, and even the past two years — great return years for the S&P 500 — had notable intra-year pullbacks. Let's take a look at where we are, how we got there and, importantly, what to do about it.

Tariff policy is a key priority for the Trump administration, which openly discusses its use as an international bargaining chip for the U.S. and is seen as a way to revive domestic manufacturing. But it risks a wider trade war, inflation and potential negative impacts to economic growth.

The market is having trouble processing uncertainty in the administration's policy and messaging — talk about a moving target. The level of tariffs and whether they're going to affect or not has shifted multiple times just from when I started drafting the script for this video. Tariffs are impacting corporate and consumer behavior, no doubt, but earning season was a blowout with profits advancing a little more than 14%, well above expectations, and personal income continues to rise.

The backbone of the economy remains healthy. The question will be whether it's enough to absorb the tariff impact and how expectations will change as a result. While the consumer remains in a healthy financial position, net worth, debt service, income and expectations are the most important indicator at this time and could tip the scales.

Excluding the change in expectations, the economic impact will be higher prices and lower growth. However, while this increases the probability of a recession, it is not recessionary in isolation.

Markets have reacted, but this is in a vacuum without additional policy considerations, such as the impact from deregulation and tax cuts. Recall, those are additional administration priorities along with immigration, and we expect to see some offsets to a drag on growth from the eventual impact of these additional policy adjustments.

So what to do? From a positioning standpoint, it's too early to make any widespread changes in allocations. And while international markets have rallied in the near term, there are still questions about the sustainability of growth and shifting geopolitical relationships.

The current environment is creating divergence in equity market sector returns, and we think portfolios are properly allocated there. Most notably are an underweight in consumer discretionary stocks and an overweight in health care stocks.

European equities have fared better than the U.S. so far on expectations of increased EU fiscal spending, particularly in defense. We're not convinced that the underlying fundamentals will support a sustained and meaningful rally warranting a shift in portfolios away from U.S. equities.

Chart 2, 3:52— Uncertainty is at a high level Sometimes the news shifts the market's direction intraday, and that sort of short-term volatility is difficult to predict and manage around. It is important to remember that volatility doesn't equal loss. Short-term time periods are relatively uncertain even in stable periods. Over time, fundamentals tilt the scales increasingly in favor of long-term investors.

It's important that we remain focused on the equity market backdrop and support of fundamentals. The U.S. economy appears resilient despite widespread expectations of weakness. Growth is slowing but still healthy. Inflation is cooling from high levels. The Fed remains more likely to cut than hike. Earnings per share growth is likely to drive 2025 returns. And market valuations are high, but the recent pullback has helped improve that picture. Periods of volatility are challenging and sometimes tempt us to stray from the fundamentals and make changes based on the moment. That is rarely the best choice.