Navigating Market Volatility Amid Government Policy Shifts
Navigating Market Volatility Amid Government Policy Shifts
The early months of the year have delivered what we expected: heightened market volatility amid shifting government policy priorities. As we noted in our previous commentary, investors should brace for swings driven by evolving government actions—and that’s what has unfolded so far this year. Recent headlines around new tariffs, geopolitical relations, government layoffs, and spending cuts have added fresh uncertainty, leaving some investors wondering whether it’s time to retreat into cash or safe-haven assets like gold.
While the news cycle has been fast and furious, it hasn’t altered our core market and economic outlook. Instead, much of what we anticipated—policy-driven volatility and the potential for a stock market pullback—has already begun to materialize.
Market and Economic Conditions: Where Do We Stand?
Stock markets have faced pressure from renewed trade tensions and geopolitical uncertainties, with the stocks sliding on tariff announcements targeting Mexico, Canada, and China. Tech stocks, particularly in AI-related sectors, have seen some sharp swings, reflecting a shift to a more risk-off environment after previous outsized gains left valuations stretched. While geopolitical risks and export restrictions remain factors, the broader pullback has been driven by investors reassessing growth expectations and risk appetite within the AI and broader tech space.
Meanwhile, defensive sector stocks—such as healthcare, consumer staples, real estate, and utilities—have held up well, as their stable earnings, essential services, and dividend yields tend to make them more attractive during periods of market uncertainty. This relative outperformance has highlighted the importance and benefit of broad stock diversification. At the same time, bonds have appreciated as longer-term interest rates have declined, benefiting from increased demand for safer assets as investors seek stability amid market uncertainty. This negative correlation to stocks reinforces the importance of bonds in a well-balanced portfolio.
On the economic front, we are seeing some cooling. Government layoffs and spending cuts could further weigh on short-term growth, particularly in sectors reliant on federal funding, while also contributing to labor market uncertainty. However, over the long term, these measures may help curb deficits and improve fiscal sustainability, potentially creating a more stable economic foundation. The latest Institute of Supply Management’s Manufacturing Purchasing Managers Index (PMI) showed a slowdown in business activity, and the labor market—while still strong—is showing early signs of softening. Inflation, too, could see a temporary bump as new tariffs ripple through supply chains and geopolitical tensions affect global trade flows, but we do not anticipate a sustained inflation shock.
Looking Ahead: Policy as a Double-Edged Sword
While recent policies have injected uncertainty, they also set the stage for potential tailwinds later in the year. The likelihood of tax cut extensions and further deregulation may support economic activity in the second half of the year.
Similarly, while tariff risks remain, historical precedent suggests that aggressive trade posturing often leads to negotiated deals rather than prolonged disruptions. For example, during the U.S.-China trade war of 2018-2019, despite initial market volatility and economic uncertainty, both countries eventually reached a phase-one agreement, reducing some tariffs and stabilizing trade relations. Additionally, past tariff increases have often resulted in temporary inflationary pressures but limited long-term economic damage as supply chains adjusted.
As the year progresses, we expect economic growth to moderate but remain resilient. Market volatility may persist, but fundamentals—particularly strong corporate earnings and consumer spending—should help support stocks and other growth assets, providing some resilience against a potential severe bear market.
Investment Implications: Staying Diversified and Disciplined
It’s times like these that serve as a great reminder to revisit portfolio allocations to ensure they remain aligned with long-term financial goals, especially in light of evolving market conditions.
Despite the shifting landscape, our investment guidance remains unchanged:
Stock diversification is key. Maintaining broad stock exposure across sectors and geographies helps manage policy-driven swings, particularly amid lofty valuations in certain market sectors.
Bonds help to balance portfolios. We continue to favor high-quality investment-grade bonds, which are effective portfolio stabilizers amid uncertainty and currently provide a high level of consistent income.
Private markets can provide stability. For investors who meet certain requirements and can tolerate some illiquidity, private market investments—such as private equity, private debt, and private real estate and infrastructure—can provide alternative sources of return that are less volatile and less correlated with public markets.
Most importantly, avoid reactionary moves. While cash and gold may seem appealing in the short term, history has shown that long-term investors are best served by staying the course through market noise.
Final Thoughts
The policy environment may be evolving, but that doesn’t mean investors need to overhaul their portfolios. As always, a disciplined, long-term approach remains the best way to navigate uncertain times. We will continue monitoring developments and adjusting our outlook as necessary—but for now, the message remains the same: Stay balanced, stay diversified, and stay invested.
Disclosures:
Please remember that different types of investments involve varying degrees of risk, including the loss of money invested. Past performance may not be indicative of future results. Therefore, it should not be assumed that future performance of any specific investment or investment strategy, including the investments or investment strategies recommended or undertaken by Capstone Financial Advisors, Inc. (“Capstone”) will be profitable. Definitions of any indices listed herein are available upon request. Please contact Capstone if there are any changes in your personal or financial situation or investment objectives for the purpose of reviewing our previous recommendations and services, or if you wish to impose, add, or modify any reasonable restrictions to our investment management services. This article is not a substitute for personalized advice from Capstone and nothing contained in this presentation is intended to constitute legal, tax, accounting, securities, or investment advice, nor an opinion regarding the appropriateness of any investment, nor a solicitation of any type. Investment decisions should always be based on the investor’s specific financial needs, objectives, goals, time horizon, and risk tolerance. This article is current only as of the date on which it was sent. The statements and opinions expressed are, however, subject to change without notice based on market and other conditions and may differ from opinions expressed by other businesses and activities of Capstone. Descriptions of Capstone’s process and strategies are based on general practice, and we may make exceptions in specific cases. A copy of our current written disclosure statement discussing our advisory services and fees is available for your review by contacting us at capstonefinancialadvisors@capstone-advisors.com or (630) 241-0833.