The Fear Factor:

The markets have been experiencing significant turbulence over the past few weeks. The new administration’s policies, and specifically the new tariffs that seem to be proposed on a daily basis, have created a lot of uncertainty for investors just like yourself. If you’re struggling to understand what’s going on, you are by far not the only one.

In this newsletter, I wanted to share some facts and ideas that will hopefully help you make the right decisions to protect, and hopefully even grow, your finances in turbulent markets. I’ve had many conversations with our clients on the current issues and I thought the Q&A format was the best option to outline my ideas.

Please do not consider any of this as financial advice. Every situation is different. You should always do your own due diligence or speak with a qualified financial advisor.

Where are we in the markets today?

As of March 16, 2025, the U.S. stock market is in correction territory, with the S&P 500 having fallen more than 10% from its record high reached on February 19. This downturn is attributed to several factors, but most importantly to the new administration’s escalating trade conflicts.

How long do corrections generally last?

Stock market corrections typically last around 3 to 5 months. The average market decline during a correction is between 13% and 14%. The average recovery time for a correction is about 4 months.

In general, market corrections are considered healthy as they reset expectations and excess valuations.

Was this correction unexpected?

Absolutely not.

After almost two and a half years of above-average market performance that resulted in high valuations, most market professionals were expecting a correction. Tariff uncertainty is the primary cause of this correction, but it could have been anything else.

Are there any similarities to past events?

I recall having similar conversations with our clients in 2018 during the U.S.-China trade tensions. Here is a brief summary of what happened. The S&P 500 experienced a decline of about 6.2% in 2018, with sharp drops as trade tensions escalated. In August 2019, when China devalued its currency and retaliated against U.S. tariffs, the S&P 500 experienced daily declines of up to 3%.

Despite these challenges, markets showed resilience after the Phase I trade deal was announced in late 2019. The S&P 500 index posted an impressive return of almost 31% for the year 2019.

Is the U.S. market down across the board?

Not at all. More mature large-cap value or dividend-paying stocks are up by close to 2% for the year. Most of the impact has been felt by growth-oriented stocks that were some of the top performers over the past few years. Please also remember that financial markets are notorious for overreacting to certain events, both positive and negative.

Are there any positives at all?

Economic growth forecasts for 2025 have been adjusted to reflect a more sustainable pace, with the average GDP projection now at 1.7% As an example, Goldman Sachs has refined their outlook and emphasized steady progress despite external challenges. The unemployment rate remains low at 4.1%. Unemployment claims have decreased to 221,000, a level historically associated with economic growth.

Somewhat unexpectedly, the most recent inflation report showed that the annual inflation rate eased to 2.8% in February 2025, down from 3% in January. The new administration’s tax cuts and deregulation efforts are expected to produce positive results for the economy and stock market closer to the end of 2025.

There are also opportunities outside of the U.S. as some foreign markets show signs of renewed interest after almost a decade-long underperformance. Please also keep in mind that the markets tend to absorb and reflect available information rather quickly and even overreact as I mentioned earlier. It’s possible that some of the negative impacts have already been priced into the market.

Have bonds been effective in providing protection?

Short-term government bonds are in the green for the first 2.5 months of the year, up approximately +1.0%. Bonds as a category are up approximately +1.50% for the same time period. If you have been relying on bonds for your portfolio protection and cash needs, you should be fine.

I’m in retirement and currently drawing from my portfolio for my living expenses. How should I approach the markets?

If you have been preparing your portfolio for market turbulence, you should have at least three options available to you.

1.) Use the bond portion of your portfolio for your cash needs. We usually maintain anywhere between 5 to 7 years of cash needs in bonds for our clients who are in retirement.

2.) Use the income your portfolio generates for your ongoing cash transfers. For our clients, we usually target to cover at least 70% of expenses with portfolio income.

3.) If you need to sell any of your stocks, which should not be the case if you have a strong financial plan, consider focusing on more conservative options.

You want to stay away from “selling low” as much as possible, as this can have a negative impact on your portfolio and lifestyle in the long run.

I’m at least five years away from drawing from my portfolio. What’s the best course of action for me?

Consider buying stocks at lower prices but be careful and judicious. Remember that an overpriced stock that is down 20% or even more doesn’t necessarily mean good value. As I mentioned earlier, please understand that market recoveries take some time, so don’t expect any immediate results. Ideally, you would want to determine how much you can safely invest and then gradually do so over several months, depending on your risk tolerance and personal preferences.

I’m fearful the new administration will destroy the economy. What should I do?

When markets are volatile, emotions tend to run high. The situation is exacerbated given our political environment and strong views on each side. Please understand that emotional decisions, regardless of how strong, usually lead to suboptimal financial outcomes. If you have a financial plan in place, you should follow it. If you don’t have one, I hope the ideas in this newsletter will help you. Feel free to reach out if you want to review your existing plan or need help creating a new one.

Should I consider any other financial planning strategies?

Market turbulence presents great opportunities for Roth conversions, as any future gains would be captured inside your Roth IRA (i.e., tax-free growth). There is a potential opportunity to harvest losses for tax purposes if you initiated any of your stock positions in late 2024 or early 2025.

What are the biggest challenges for a successful long-term investment plan?

Fear and greed are the biggest issues for many investors, including professionals. Less than two months ago, many investors were overly optimistic about the future and willing to pay almost any price for some of the top companies. The mood has changed, and fear seems to be dominating the markets. The same companies are now selling for 20% to 30% less than they were just two months ago.

It’s easier said than done, but fear can be your biggest obstacle to overcome. A key insight from the field of behavioral finance is that people tend to fear future uncertainties more than their present circumstances, significantly impacting their financial choices.

As Warren Buffett mentioned in one of his famous shareholder letters, “A climate of fear is your friend when investing; a euphoric world is your enemy."