Navigating Market Volatility in 2025

Market Overview

After reaching all-time highs in February, U.S. markets have experienced notable volatility amidst a flurry of news regarding tariffs and rapid changes in the geopolitical landscape. The S&P 500 is now negative for the year, having declined nearly 7% from its mid-February peak, while the tech-heavy Nasdaq briefly entered correction territory this week, and is down over 9%. This pullback has effectively erased the post-election gains, and investors have been seeking safe havens like bonds and gold.

Understanding Current Volatility Drivers

It’s important to note that to date, market weakness has been driven primarily by high levels of uncertainty rather than any meaningful change to economic fundamentals. Investors dislike uncertainty in any form, and we're experiencing it through multiple channels.

While we get tariff headlines multiple times a day, we still don’t know: Will all the proposed tariffs actually go into place? How long will they last? What might ultimate settlements look like? How will consumers respond? How will manufacturers respond, domestically and abroad? 

The past several weeks have made it clear that proposals and threats can change at any moment. Unpredictable policy leads investors to reduce risk exposure and keep capital on the sidelines, at least temporarily until they have a better sense of the playing field.

Contextualizing Market Pullbacks

While we’ve seen impressive performance in equity markets for two consecutive years, pullbacks are normal. On average, the S&P 500 has seen a correction, or decline of at least 10%, every year going back to 1928. Declines of 5% are even more common, occurring over 3 times per year on average over that period. In spite of these regular drawdowns, the S&P 500 has managed strong double-digit returns over the past 100 years. In many instances, pullbacks can be healthy for durable market returns, curbing euphoria and preventing a more drastic and damaging crash later on. 

Portfolio Diversification Demonstrating Value

This volatility has reinforced the benefits that diversification can offer across both asset classes and geographic regions. Thus far this year, while the S&P 500 is down 1.9%, we’ve seen:

• International equity strength: European equities have delivered their best relative performance to start the year since 2000, with double-digit gains during the first two months of 2025. Emerging markets are also showing gains against U.S. market declines.
  
  
• Fixed income outperformance: Bonds are up over 2% for the year while U.S. equities have declined, demonstrating their essential role as portfolio stabilizers during market turbulence.

Foreign markets entered the year in a very different place than US equities. International stock valuations were at historical levels of discount vs. U.S. stock valuations. Many international economies are also significantly earlier in their economic cycle (meaning they have seen recessions more recently) than the U.S., setting the framework for a longer potential period of future economic growth. At the same time, investors have been meaningfully underweight international equities relative to historical levels. All of these factors are contributing to the outperformance of international stocks we’ve seen year-to-date.

Meanwhile, bonds are acting as a hedge against a potential economic slowdown in in the U.S. Domestic consumers and businesses are grappling with monetary policy that has been restrictive for an extended period of time and significant uncertainty related to trade policy. As investors get concerned about the potential impact to the economy, they bet that the Fed may have to ease and bring rates lower in the future than they are today. This causes bond prices to rise, offsetting weakness in the equity markets.

Medium-term, we still believe the U.S. equity markets are a great place to be invested and maintain significant exposure to domestic stocks in our portfolios. Some of the highest quality companies in the world are in the S&P 500 – these businesses can grow earnings regardless of economic pressures. We also take comfort in the Fed’s capacity to stimulate the economy should growth and corporate earnings come under meaningful pressure. 

However, we also recognize other regions of the world can generate attractive returns, especially given relative valuations and greenshoots as it relates to international earnings. We also know that diversification can help ensure balanced returns in periods of temporary weakness in a particular region or asset class.

Strategic Actions for Investors

During periods of elevated volatility, here’s what disciplined investors can do:

1. Strategic Tax-Loss Harvesting

Market declines create valuable tax-loss harvesting opportunities. Identifying positions with unrealized losses while maintaining market exposure through temporary substitutes can generate significant tax benefits. Ideally, you’ve implemented automated harvesting processes to capitalize on volatility without making emotional decisions during market stress.

2. Portfolio Rebalancing

Market movements naturally shift allocations away from targets.Given the recent move lower in equities and appreciation of bonds, you may have experienced drift relative to your target allocations. Rather than relying solely on calendar-based approaches, consider a volatility-based rebalancing strategy that responds directly to market conditions. This approach allows portfolios to systematically "buy low and sell high" by trimming outperformers and adding to underperforming assets. 

3. Opportunistic Capital Deployment

For investors with available capital to deploy, you can take advantage of better entry points into US equity markets compared to recent market highs. Historical data suggests that after a 5% pullback, average stock returns 1-year later are ~12% and markets are higher 75% of the time. 

4. Stick to Your Plan

Perhaps most critically, avoid reactive decisions driven by headlines or short-term market movements. If you have a financial plan, remember that it already incorporates scenarios of significant market stress! Stay disciplined – the benefit of having a plan is you aren’t forced to sell at inopportune times because you took too much risk or lacked confidence in your positioning.

During volatile times, you can also take a moment to revisit your long-term goals. This helps you stay focused and keep things in perspective. Try to limit how much you're watching the daily market news; it can often lead to knee-jerk reactions.

Conclusion

While market drawdowns can be stressful, data shows that if you are invested for decades, the negative impacts of short-term market movements are dwarfed by the long-term positives of compounding returns. Stay disciplined and take advantage of the opportunities created by market volatility.

If you don’t have a plan or haven’t engaged with your Range advisory team in a while, this is a great time to reconnect!

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