An Update on Recent Market Volatility
2025 started mostly on a positive note for markets. The United States (US) was poised for growth, and whilst the US market appeared expensive, many were predicting another good year for US equities. Globally, inflation appeared to be under control or least on a downward trajectory.
The usual mix of geopolitical tensions, domestic politics, and trade tensions were bubbling away but didn’t seem to worry markets. Investors had embraced the idea of “US exceptionalism” – defined as the idea that the US is distinctive or exemplary compared with other nations. The outperformance of the US bond and equity markets in 2024 was expected to continue in 2025.
The last few weeks have seen a significant change of narrative. What changed? In two words: President Trump. Investors initially embraced a Trump administration, expecting a focus on revving up growth with a mix of tax cuts and deregulation. That sentiment has now changed with “Trumpcession” the latest buzzword.
Weaker economic data shows that the US economy is shrinking as fallout from Trump’s hefty trade tariffs and slashing of government spending weighs on markets. Negative GDP growth is now expected for the first quarter of 2025. Noting that the technical definition of a recession is two consecutive quarters of negative GDP growth. More worryingly for the market is President Trump’s narrative switching to that of ‘no pain, no gain’ and not ruling out the possibility of a recession.
In addition, President Trump’s geopolitical moves, particularly his unwillingness to back NATO, has further upended global trade and political relations. The downstream impact to interest rates, trade, capital flows, consumption, investment decisions, and economic policy is difficult to predict.
There is some good news. Whilst the focus has been on the US, European and Chinese markets have performed well in 2025. The other point that some market commentators are making is that this could be the market correction that is needed, given the frothiness of the market at the beginning of the year. ‘Buying the dip’ may be the right strategy. The US still has levers such as tax and interest rate cuts to avoid a recession.
What does this mean for my investments?
The issues causing the current volatility are unlikely to be resolved in the short term. We anticipate that some level of uncertainty will permeate markets for some time. It will take some time for markets to adjust to what many commentators are calling a seismic shift to the world economy caused largely by the Trump administration’s policies.
It is normal to feel anxious during periods of market volatility. However, the long-term strategy of a well- diversified portfolio commensurate with your risk tolerance is still the most appropriate course of action. Knee jerk reactions seldomly lead to good investment outcomes.
Given the current market conditions, your allocation to fixed interest investments is a strategic advantage. Your fixed interest assets, such as government and corporate bonds and Income Securities provide a stable foundation for your portfolio, offering predictable returns and reduced overall volatility.
This fixed interest stability is especially valuable during periods of economic uncertainty, including ‘Trumpcession' helping to safeguard your investments against market fluctuations. We have seen fixed interest re-set over the last 6-9 weeks or so, and while we may have given up some returns in the shorter term, we now look to see the higher price counter with improved client returns over the next period of 18 to 24 months for this sector.
Additionally, fixed interest investments generate a steady income stream, which can be particularly beneficial when equity markets are experiencing turbulence. By maintaining a significant portion of your portfolio in fixed interest, you are well-positioned to navigate the current market environment with confidence and resilience.
If you have any concerns about your portfolio or investment strategy, please contact your financial adviser.
Important Information:
This Market Update is issued on behalf of Personal Financial Services Limited. ABN 26 098 725 145, AFSL 234459 ("Licensee"). The information in this update is general only and has not been tailored to individual circumstances. Past performance is not a reliable indicator of future performance and before making any investment decision, you should assess your own circumstances or seek personal advice from a licensed financial adviser. This publication is not available for distribution outside of Australia and may not be passed on to any third person without the prior written consent of the Licensee.