Market volatility driven by fear, emotion

The U.S. is about 10 weeks into a new administration, and a post-election market surge has turned into a hangover.

That was one of the takeaways from a recent National Association for Fixed Annuities webinar on what’s new and what’s next for the markets.

The only thing that’s consistent about the markets since President Donald Trump took office is inconsistency, said Mark Hackett, chief market strategist with Nationwide.

“We had that post-election surge that quickly led to a hangover,” he said. “In recent weeks, we’ve seen only one direction. We’ve now given up all the gain we had year to date. We’ve had a 9% drop in the S&P 500 in just 13 sessions. That is about as fast a drop as we’ve seen since the bear market of 2022.”

Hackett said the market decline has been driven more by fear than by actual data. “It feels chaotic but remember it’s following two very strong and stable years, so the context there matters.”

While U.S. markets are dropping, international markets are rallying, he said, which “would have seemed unspeakable when we were sitting at record highs. That is how quickly things are shifting in this market.”

The current market hangover “has been intense,” Hackett said.
“It’s not unusual for investors to react emotionally to elections. We often say trading on emotion is unwise but trading on political emotional is potentially catastrophic.”

The Trump administration operates differently from previous administrations – whether Republican or Democrat – Hackett said.

“This also was the case in 2017; we had a lot of choppiness early on until we became a little more accustomed to some of the tone and the behavior of the first Trump administration. This year is 2017 on steroids.

“But my belief is that investors are taking policy announcements, particularly tariff conversations, too literally and the reality will probably be less extreme than the initial offer.

“I think we are in a bit of uncharted territory here and recent history may not be a perfect guide.”

Tariffs are fueling market uncertainty

Tariffs have been blamed as one source of market volatility.

“Tariffs always lead to less comfortable outcomes,” said Brian Levitt, Invesco global market strategist.  “Somebody has to pay for them - either with reduced corporate profits or consumer inflation or both.”

Levitt said that may be good reasons for tariffs – to defend national security or to protect industries, for example – “but they come at a cost.”

“It doesn’t mean tariffs must result in bear markets, it doesn’t mean tariffs must result in recessions, but you just get a less optimal outcome,” he said. “We need policy clarity. Until then, markets will have a hard time finding their footing.”

The longer the period of policy uncertainty, the bigger the challenge to the economy, Levitt said.

“Economic slowdowns and recessions are policy mistakes – plain and simple.”

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