During March and April, we published two notes for clients centered around the idea that negative investor sentiment and President Trump’s tariffs had reached unsustainable extremes. Tariff induced policy uncertainty led to a sharp correction – or decline – in equity markets from February’s highs.

It may be surprising, but corrections – defined as stock market declines of -10% to -19.99% – are common¹. Since 1950, we’ve experienced 34, or roughly one almost every other year¹. When corrections occur, the market has historically recovered in an average of 3.5 months¹. During such periods, 3.5 months may feel like dog years, but they are typically brief. What’s remarkable about the 2025 recovery is that it happened in about six weeks.

There is a school of thought that markets react to information faster today than in the past. Common explanations include greater access to data, the ease of trading, and the rise of algorithmic trading. The speed at which markets price in new information – coupled with our current administration that is untraditional in approach – requires a potentially more dynamic thought process.

One concept we discussed internally as a team is tied to a baseball analogy. In March, it felt like we were in the early innings of uncertainty – whether due to tariffs, policy shifts, or interest rate concerns. However, we were cognizant that clarity may suddenly arrive, putting us in the ninth inning.

This belief – combined with the understanding that the best and worst days for the S&P 500 typically cluster closely together – led to a posture of remaining fully invested. While history doesn’t always repeat, it often rhymes. Investors experienced the third-best single day for the S&P 500 since 1950 on April 9th³.

Although official tariff deal announcements have been limited, we are encouraged by the direction of negotiations with critical global partners. As we move closer to the end of the 90-day reciprocal pause on tariffs, investor attention will likely return to trade policy. Securing deals with China and other major trading partners remains essential.

We’re also encouraged by the ongoing resilience of the labor market, the strength in first-quarter corporate earnings, and that despite the rally, investor sentiment remains subdued. Equity market valuations have recovered, setting a higher bar for companies moving forward in the eyes of investors.

However, we do caution that, despite the S&P 500’s recovery, several important questions remain unanswered:

• The impact of tariffs on economic growth and inflation. The data over the coming months will provide clarity on how tariffs are impacting the economy and consumers. Corporations have indicated prices may increase. Lower oil prices may help potentially offset some of the strain.

• The magnitude of potential interest rate relief from the Federal Reserve. Fed Chair Jerome Powell intends to be patient, while the market is pricing 1-2 interest rate cuts in 2025⁴. How tariffs affect growth, the labor market, and inflation will be under the microscope.

• The final contents of President Trump’s “Big, Beautiful Bill”. The bill, which is in the hands of the Senate, is expected to make the temporary tax cuts permanent, but also add meaningfully to the nation’s growing budget deficit. Long-term interest rates have been rising in recent weeks as investors grow increasingly concerned about spending and the rising fiscal deficit.

Potentially the greatest near-term risk to the market is the substantial rise in longer-dated interest rates observed recently within the treasury market. Higher interest rates may slow growth and lead to higher borrowing costs for individuals, businesses, and corporations. This is especially troublesome for the housing sector, where affordability remains a key issue.

Recent market volatility provided an opportunity to reposition our equity portfolio. We were pleased to add high-quality businesses at attractive valuations. Additionally, the recent increase in interest rates offers fixed income investors compelling gross yields, regardless of their investment duration, without requiring a compromise on quality.

While uncertainty remains elevated, we believe the investment and economic backdrop is directionally sound – driven by the resiliency of the consumer and solid corporate fundamentals. In the near term, it would not be a surprise to see equity markets retest lower levels. Potential catalysts include a prolonged and challenged effort to pass legislation, rising deficit and interest rate concerns, as well as renewed tariff uncertainty. We believe selectivity and managing risk will be paramount going forward.

From all of us here at Asio, we hope you have a wonderful summer. It is our pleasure to continue to serve you.

Bryce Goldbach, CFA ®
Portfolio Manager & Wealth Strategist
05/21/2025