Amid uncertainty in equities and credit markets, we remain focused on long-term investment fundamentals and building portfolios to weather the storm and deliver for clients.
At the start of 2025, following Donald Trump’s election victory, there were expectations for a strong US economy coupled with concerns over rising inflation. Europe, meanwhile, was set to maintain its slow-growth trajectory. However, recent developments – largely driven by US policy decisions on multiple fronts – have jolted global financial markets and altered the investment landscape significantly.
Key drivers of recent volatility
In the US, the establishment of the Department of Government Efficiency (DOGE), with its mandate to reduce federal government spending, is having substantial implications for the wider US economy. Consumers who perceive that their jobs may be under threat are beginning to pull back on spending, and already we are seeing some of the US growth indicators weaken through the first quarter.
Internationally, while US tariffs on Chinese goods were widely expected, the scope remains uncertain. However, the imposition of tariffs on Mexico, Canada, and Europe – traditionally US allies – has added to trade unpredictability. This tariff uncertainty has left businesses hesitant to make investment decisions, delaying capital expenditures, and weighing on economic momentum. Indicative of this is the recent rise in the CBOE Volatility Index, or VIX (Figure 1), a forward-looking index that measures the market’s expectation of future volatility.
Figure 1: Volatility is on the rise (VIX, 1-year)
Source: Bloomberg, as of 12 March, 2025.
In addition, the Trump administration’s recent foreign policy moves – and notably the meeting between the US president and his Ukraine counterpart Volodymyr Zelenskyy – have caused a profound policy shift in Europe. Leaders such as Germany’s likely new chancellor, Friedrich Merz, are emphasising the need for greater European self-reliance. Policymakers have signalled increased government spending, particularly for defence, alongside broader European fiscal expansion. As a result, Europe is now expected to see stronger growth in 2025 and 2026 than previously anticipated.
Key areas of focus for investors
With all these developments playing out on the global stage, what has been the impact on markets, and where do we see risks and opportunities?
So far, we have seen the US stock market trend down over the past month – the S&P 500 has entered ‘correction’ territory, down more than 10% since from its recent high in February. Indeed, since early December 2024 the EURO STOXX 50 Index has outstripped the S&P 500 by about 15 percentage points1.
However, if this US weakness does continue, we believe it is highly likely that Trump will seek to reverse it. His upcoming tax policy announcements could have a significant impact on market sentiment, and while the current slowdown has increased expectations for rate cuts, potential fiscal stimulus could shift that.
In credit markets, yields in Europe have gone up meaningfully, particularly over the past six weeks, driven by the extra spending expectations. Conversely, in the US we have seen yields come down as growth expectations start to soften. This divergent movement on different sides of the Atlantic is not necessarily that common. Elsewhere, high-grade credit spreads remain stable, but weaker segments such as CCC-rated high-yield bonds are beginning to experience sell-offs. This suggests a growing divergence between strong and weak corporate balance sheets.
And lastly, despite initial fears that Chinese growth would be severely impacted by tariffs, so far, we have not seen the anticipated detrimental effect. Moreover, President Xi’s willingness to engage with the private sector, recognising its essential role in China’s economic growth, has led to a recovery in the country’s markets. This development underscores the importance of staying attuned to geopolitical dynamics and their economic implications.
Navigating volatility
There is much to think about – particularly with the interconnectedness of the global economy and the unintended consequences of ‘America First’ that subsequently play out across global capital markets. However, even in times of uncertainty, it is possible to home in on the certainties.
At Columbia Threadneedle Investments, the global fundamental research team – experts in deep analysis – is now focusing on distinguishing between short-term market noise and fundamental economic shifts.
At a company analysis level, attempting to predict US tariff policy, for instance, is speculative – does one assume a 25% tariff or not; will the tariff be introduced one week and withdrawn the next? This breeds uncertainty. But what it also does is crystalise a decision by companies to simply delay any potential investments due to uncertainty around economic policy. Similarly, we know there will be reduced government spending in the US and the reverse in Europe, and we can conduct analysis and be quite confident about the outcomes.
This emphasises the importance of active management, and the value that a robust, global research team brings to modelling what is certain and what is simply hypothetical.
The importance of staying invested
Investors will often make the mistake of trying to time the market by simply selling out of it. But it is important to keep perspective. Although painful in the near term, the correction we are currently experiencing is not excessively outside of the norm – the long-run average of the VIX is 20, as of 12 March it was running at 24 (Figure 2).
Figure 2: Volatility in perspective (VIX, 2000-2025) Over the long term volatility is well within range
Source: Bloomberg, as of 12 March, 2025.
The recent market gyrations also reflect the 30th correction of 5% or more since the lows back in March 2009 during the global financial crisis, a period which has seen annualised returns of more than 14%. The narrative will no doubt shift once again, but historically some of the worst short-term market fluctuations and losses were followed by periods of substantial market recovery. Therefore, the potential to miss the subsequent gains is real (Figure 3).
Figure 3: Time in the market beats timing the market
Source: Columbia Management Investment Advisers, LLC and Bloomberg as of 31 December, 2024. Past performance does not guarantee future results. The S&P 500 tracks the performance of 500 widely held, large-capitalisation US stocks. It is not possible to invest directly in an index.
The bottom line
Although political uncertainty often creates temporary market dislocations, investors should remember that long-term investment fundamentals remain the most reliable guide to future returns. At Columbia Threadneedle, we are committed to a research-led approach that enables us to navigate uncertainty and position our portfolios for strong long-term performance. In an environment where unpredictability is now the norm, investors should lean into disciplined active investment strategies and research intensity to build all-weather portfolios for any environment.
