Chart: Uncertainty around economic policy has increased
To start, it is important to understand the difference between how individuals and households feel about the economy versus what drives financial markets. For example, when the prices of everyday goods and services increase, this can present challenges for our personal budgets. However, it may create potential opportunities in investments that can benefit from price increases. So, it’s important as investors to remain objective and distinguish between our personal experiences with the economy and the factors that influence long-term investment returns.
While the economy and stock market are not the same thing, they influence one another in important ways. When economic growth is strong, corporate earnings tend to grow which can boost share prices, and vice versa. Similarly, stock and bond markets can sometimes serve as a leading indicator for the broader economy since they reflect the forecasts of millions of investors.
Why have recession concerns risen?
The administration has said there may be a period of short-term “turbulence” in the economy. Even if tariffs do not directly harm growth, they have created an environment of uncertainty, as shown in the chart above. The administration has acted more swiftly with broad tariffs compared to President Trump’s first term, making the outcome harder to predict. Only time will tell if tariffs reach rates not seen since the 1930s, or if agreements with major trading partners will be reached.
It’s important to remember that tariffs are often used as a negotiating tactic for broader policy objectives. In the past, market reactions to tariff announcements were more dramatic than their actual economic impact. In 2018, the market fell as tariffs were implemented, but earnings growth was still strong and GDP was almost 3% that year.
Chart: The economy has grown steadily despite investor fears
Beyond tariffs, the economic data is causing concern, including hotter-thanexpected inflation and mixed jobs numbers. For example, the Consumer Price Index reversed course recently and rose above 3.0% for the first time since last summer.
Adding to this uncertainty, federal government jobs fell by 10,000 in February according to the Bureau of Labor Statistics, and more are expected. While federal workers account for less than 2% of the workforce, there is concern of ripple effects on the private sector and job growth overall. Despite this, the economy still added a healthy number of jobs in the latest report.
Chart: The S&P 500 experiences pullbacks on a regular basis
While the thought of a recession can be unpleasant, it’s important to remember that periods of slower economic growth are a natural part of the business cycle. Forecasts are not always correct, and even when they are, markets do not always behave in expected ways. While the past is no guarantee of the future, the market declines and subsequent sharp recoveries in 2020 and 2022 are recent examples of situations where markets can quickly change their tune. In addition, both the Fed and Treasury have shown a proclivity to react swiftly and decisively should economic conditions deteriorate.
Similarly, short-term market pullbacks are a natural part of investing especially after periods of over valuation . As the accompanying chart shows, the S&P 500 experiences pullbacks on a regular basis, even as it has risen in the long run. The current correction sits at negative 10% with the average major pullback measuring 14% so we are more than halfway there should a normal correction materialize. Beneath the broad market, many individual companies are more than 20% off their highs, which can create compelling buying opportunities. We have increased the cadence of our Investment Committee meetings to ensure we do not miss any buying opportunities.
- Standard & Poor’s and Nasdaq have declined 3.95% and 9.21%, respectively, as of March 10, 2025
- S&P 500 price return from September 20, 2022 to March 7, 2025
- Nasdaq Composite price return from December 22, 2022 to March 7, 2025
