By: Paul Morrone
We entered 2025 on a high note, only to be knocked off the top of the mountain by a flurry of activity out of Washington. As markets and investors try to digest the deluge of information that comes in on a daily basis, uncertainty remains elevated. The unpredictable (read: chaotic) nature of the Trump administration’s approach to tariffs and austerity (i.e. DOGE) have led investors to recalibrate their short-term expectations. You’ve long heard me say that presidential policies don’t cause market meltdowns like 2001 or 2008 – and I’ll stand by that theory until proven wrong. That’s not, however, to say that politics can’t cause volatility and fear, which is normal and has existed as long as markets themselves.
What markets don’t like is uncertainty – and we have that in spades today. The good news is that things will normalize in time. Tariffs, in whatever form they come in, will get worked into expectations and companies will adapt. As with any major event that impacts the economy, there will be winners and losers throughout the process, and markets will continue to reward the winners and punish the losers.
Where you’re seeing the greatest impact of volatility right now is at the very top of the market – which has an outsized influence on the day-to-day performance of the major indices. This includes last year’s market darlings such as Nvidia, Apple, etc. – the magnificent 7 or fab 4 – that accounted for the majority of the S&Ps performance over the past several years. Unfortunately, as the saying goes, the bigger they are, the harder they fall. Nvidia, for example, is now trading about 30% below its January peak.
The S&P500 is what is referred to as a cap-weighted index – meaning the larger the company, the heavier it is weighted in calculating the daily value of the index itself. In fact, the 8 top 10 companies in the S&P500 are all tech or communications companies (in order, Apple, Microsoft, Nvidia, Amazon, Meta, Google, Broadcom, Tesla). As of the time of this writing, the S&P500 is down about 5% YTD and about 8% from its January high – largely due to a selloff in these very sectors. From a historical perspective, moves of this magnitude are not even considered a blip on the radar. These types of pullbacks often happen multiple times in a calendar year.
What tells a more interesting story is the S&P500 equal weighted index, which as you could imagine, equally weights ALL 500 stocks in the S&P 500. This mitigates the outsized impact of the ‘size’ factor on the index performance and weights the smallest company in the index just as much as Apple. By comparison, the equal weight index is roughly flat for the year when compared to its cap weighted brother. What that tells us is that, when looking at the broader markets and economy, that things may not be as bad as they seem on the surface. To draw on another old saying, we can’t always judge the book by its cover.
From a portfolio perspective, investors who lamented portfolio performance that lagged the S&P 500 are now finding solace in the fact that they are diversified and are thrilled to have exposure to asset classes that they once begrudgingly owned because they knew deep down it was the right thing to do. Asset classes like value stocks, developed international stocks, gold and even bonds have been bright spots during this brief period of volatility and have helped to lessen the blow to portfolio bottom lines. These once black sheep are now in the limelight, and for good reason.
In an effort not to sound too optimistic, what we do remain cautious of is inflation. It has yet to be seen how the tariffs will impact the price of goods and services here in America. And rest assured, the Fed is watching. A renewed rise in inflation, whatever the cause, could potentially cause them to reverse their course on interest rate policy which could have a larger impact on markets than the tariffs themselves.
As always, we welcome your questions and recommend keeping your focus on the long term (which is way longer than 4 years!). Within portfolios we continue to monitor the risks that present themselves and make tweaks to ensure we are not over-concentrated in any one area. We will keep you informed as the year unfolds and will be holding additional educational events in the coming months to answer your questions and concerns directly.
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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly. All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.