Letter From the CIO: Market Volatility

Dear Investors,

As investors who focus their investments on retirement or other financial goals, we know market volatility can be unsettling, but it is also a natural and necessary part of investing. The simple key is to stay disciplined, focus on those goals, and continue to make informed decisions that are unobstructed by emotion. If you indeed have lingering concerns about your portfolio, the best thing to do is to check in with your financial advisor for how to plan around these occasional periods of volatility.

In terms of today’s market, the degree of volatility we have seen in recent days has been a rarity over the last two years, making it important for us to offer our view of the causes and help establish some perspective. Notably, the S&P 500 Index has been down for five of the last six weeks. While this historically is a normal, and often necessary occurrence, investors have likely grown accustomed to the smooth ride the market has provided over the last 24 months. As a result, this bout of volatility, while subdued versus historical standards, may seem more severe. Thus, more questions are asked. More concerns are raised. So, let’s address some of the elevated anxiety.

What’s Driving Market Volatility?

• Tariff policies and economic uncertainty: First, let’s discuss the causes of the volatility, both the issues that have come up in the news and those that haven’t. The Trump Administration’s tariff policies have introduced some unease among market participants. Are those policies negotiation tactics or are they part of a new governance framework? The answer appears to be a little of both. Is that framework clearly and sustainably inflationary? We believe it is premature to say, as past data does not seem to draw a straight-line conclusion to that effect. Will the action cause the economy to weaken materially? Again, that is probably too early to conclude, but it does cause further unease around economic indicators that have been showing some slight sign of weakness for some time. For a while now, consumer spending, and the jobs market, while both remaining on solid footing, have begun to decelerate just a bit. And it is often not the current level of any indicator, but the directional change in that indicator which eventually causes markets to take note.
• Political landscape: On top of the worry about uncertainties around tariff policy and the economy, we have an increasingly polarized political landscape. While this by itself should not be a real surprise, it has caused the market to be increasingly concerned about the ability of U.S. political leaders to fund the government via a short-term funding bill. And the deadline for a successful continuing resolution is March 14. Failure to pass a bill may — and Republicans have scant room for dissent on the issue — cause portions of the government to begin to close. This heightened political discourse has raised anxiety, as it nearly always does, and has added to economic worry.

Market Valuations and Expectations

What has gone unseen by many, but has been discussed widely by LPL Research, is the risk that this market may have gotten a bit ahead of itself in terms of valuations and expectations. The market had been pricing in a Trump election win; it doubled down with a further post-election market uptick, and investors were extrapolating nothing but good times ahead. In such cases, we often witness some “buy on rumor, sell on news” market activity as investors position for an event and cash in when the event occurs. The latter portion of that scenario could be occurring now as trading momentum has faded, however belatedly. This is one reason we have suggested, over the last few months, that investors should tread increasingly lightly.

What Should Investors Do?

What should investors do at this very moment? The good news is that the fundamental underpinnings of business and consumer conditions remain relatively sound. While this bout of volatility may feel acutely painful, it is likely little more than noise. However, LPL Research has been consistent in its message that this year is probably going to be choppier than the last two. Recent weeks likely serve as an adequate warning to investors who may have gotten a bit freewheeling with their asset exposure. If there is one thing we have increasingly learned over the last decade or so is that this market trades fast. And rather than try and out-trade the algorithms, individual investors should ensure their portfolios are equipped, at all times, to take the good with the bad. This bout of “bad”, we believe, is likely to be relatively modest by comparison.