Navigating Policy Turbulence: A Balanced Approach to Uncertainty

Recent volatility in the U.S. markets has some investors concerned. Below, we lay out some of the challenges facing investors today. Importantly, during periods of heightened uncertainty, it’s necessary to underscore the reality that market volatility is a normal occurrence over the long-term history of markets. It is never easy to see it coming, nor is it easy to know when, why or how it ends. Having a well-diversified global portfolio and maintaining a long-term focus can be important considerations during periods of uncertainty.

The current market volatility: Policy uncertainty & economic concerns

The latest bout of market volatility stems from policy uncertainty and related concerns over a potential U.S. economic slowdown. Since mid-February, U.S. economic data has weakened, reinforcing investor caution amid a shifting policy landscape. Concerns about tariffs and federal spending cuts adding downward pressure on the U.S. economy remain top of mind.

U.S. market challenges

U.S. markets, which entered the year with elevated valuations after delivering one of the best two-year periods in market history (2023 and 2024), have encountered challenges in 2025. Back-to-back setbacks—including uneven developments in the artificial intelligence (AI) landscape, as we wrote about in our 2025 first-quarter Insight, and more recently, from a U.S. economic growth scare arising from heightened fiscal policy uncertainty—have weighed on investor sentiment.

The transition from the Biden administration to the Trump administration has resulted in significant shifts in U.S. trade, immigration and foreign policies. Additionally, large shifts in federal spending have been underway, including reductions in the federal workforce, the closure of certain federal departments and a push to shift federal funding to state obligations.

Markets have reacted swiftly, as they typically do when uncertainty rises. The S&P 500 has now posted three consecutive weeks of declines, dropping 10%, while the tech-focused Nasdaq Composite and small-cap stocks, as represented by the Russell 2000, have entered deeper correction territory, down 14% and 18%, respectively, from recent highs. However, past performance is not indicative of future results, and market trends can shift.

Fiscal policy changes: Market impacts of sequencing & pace

The Trump administration’s key policy initiatives—tariffs, tax cuts and deregulation—are well underway. While these measures can provide a net positive impulse for U.S. economic growth over the long term, the pace and sequencing of their implementation have significantly influenced market sentiment.

Thus far, the rapid rollout—particularly the heavy upfront emphasis on tariffs and spending cuts—has weighed on U.S. equity markets. While we appear to be in the “winter” of policy changes and related market adjustments now, investor sentiment could change quickly when the focus turns from the economically punitive impact of tariffs and spending cuts to the more stimulative impact of tax cuts and ongoing deregulation.

Additionally, the sheer volume of policy announcements—83 executive orders issued so far—has created an atmosphere of acute uncertainty. The scope and duration of the U.S. tariff strategy remain unclear, with measures of trade policy uncertainty at their highest levels in 25 years. The administration’s recent practice of announcing and suspending tariffs twice for North American trading partners adds to the uncertainty, complicating upcoming negotiations in Asia and Europe. This will likely continue to drive near-term volatility as investors are more immediately focused on the tariff-related impacts of lower growth, higher inflation and diminished corporate earnings.

With that said, it’s important to note that we’re still in the very early stages of these significant fiscal policy changes. The potential net benefits may take time to materialize. A notable development is the House budget resolution, passed on Feb. 25, which authorizes up to $4.5 trillion in potential tax cuts through 2034. While tax cuts are expected to roll out later this year and could be gradually beneficial over the long term we should expect market volatility to remain elevated until we have more clarity on the final scope of fiscal policy changes.

The U.S. economy: Bending, not breaking

Over the past several years, the U.S. economy has outperformed expectations, driven by heavy federal spending, resilient consumer demand and global leadership in key technologies. The result has been an economy growing at a pace many consider to be above potential—posting GDP increases of 2.9% in 2024 and 2.8% in 2025.

Going forward, U.S. economic growth may slow but could remain positive, settling closer to a long-term equilibrium growth rate between 1.8% to 2%. The labor market remains near full employment, with unemployment at 4.1% and job creation averaging 190,000 per month over the past six months—both indicators that should continue to broadly support consumption.

Additionally, we’ve made significant progress on inflation, particularly for goods and services outside of housing. A slowing economy, a strong U.S. dollar, rising productivity and a 15% decline in oil prices over the past three months should continue to help ease inflation pressures.

None of this is to suggest the U.S. economy isn’t vulnerable to growth or inflation shocks arising from any number of known or unknown events. For the former, tariffs are the primary concern, and forecasts suggest a potential drag on growth and boost to inflation in the 0.5% range for each in 2025 with a range of wider outcomes possible.

The Federal Reserve faces a difficult task—administering monetary policy amidst a slowing economy while material fiscal policy changes are occurring. Should growth weaken further, the Fed has adequate flexibility to adjust policy rates accordingly.

Benefits of diversification: Silver linings beyond the horizon

Initially, the U.S. equity markets reacted positively to the Trump election, with the S&P 500 gaining 7.7% between Election Day and its Feb. 18 peak. However, as policy uncertainty increased, the U.S. equity markets gave back those gains, though they remain within a few percentage points of pre-election levels.

Looking more closely, there’s also a notable equity rotation underway. The narrow tech-led post-pandemic market leadership has changed dramatically, with value-style equities now outperforming growth-style stocks by 8% year to date. This shift has provided downside protection for diversified portfolios in 2025.

While U.S. equities search for a new direction, international equities have moved in the opposite direction which has been a terrific development for diversified portfolios. International equities have advanced roughly 7% year-to-date, buoyed by a striking 20% surge in Chinese and German equities. Notably, potential fiscal policy changes in Germany—particularly a recalibration of the nation’s ”debt brake”—could mark a turning point for one of Europe’s most conservative spenders, offering investors an unexpected tailwind.

Turning to the bond market, post-election, the U.S. Treasury market was initially nervous, with long-term rates moving sharply higher but has settled back to pre-election levels, providing some relief to the mortgage market and allowing investors to earn attractive income. On a total return basis, bonds have advanced 2% year to date and, more importantly, helped to mitigate the higher volatility of U.S. equities.

For those portfolios with allocations to Defensive Equity and Diversifier strategies, those allocations are also providing much-needed balance for portfolios. On a year-to-date basis, those strategies collectively have provided downside protection, diversification and lower volatility while posting positive returns.

An additional silver lining is the reminder that volatile periods are the reason equity investors tend to earn attractive long-term returns, in part due to their frequent nature. However, it’s important to note that past performance does not guarantee future results. Figure 1 illustrates the fact that market declines of 10%-20% within a single year (known as intra-year declines) are common and therefore should be accounted for in financial planning and portfolio construction processes.

Staying the course

For those understandably concerned by market drawdowns and the current administration’s sweeping policy changes, the key message is one of balance and perspective. Over the past few years, U.S. equity returns have been exceptionally strong. Even as we face a correction, the diversified portfolio—now bolstered by positive contributions from international, value-style, defensive equities, along with bonds and other diversifiers—remains fundamentally sound and provides investors with ample flexibility to capitalize on any opportunities arising from ongoing market volatility.

In times of policy turbulence, it is more important than ever to maintain a disciplined investment approach, allow your strategy to work and avoid the temptation to react to sudden repricings—sharp market fluctuations in asset values driven by new economic or policy developments. While short-term adjustments may seem disconcerting, our focus remains on long-term portfolio construction and the strategic identification of opportunities.

Market volatility, no matter the cause, can feel unsettling. But you don’t have to navigate it alone. We’re here to provide guidance, perspective and support during this time. Please reach out to your client service team if you’d like to discuss how this impacts your financial plan.

If you’re not currently a client, we welcome the opportunity to connect. Start a conversation with us—we’d love to help you gain confidence in your financial future.