- Markets are nearing a correction as the S&P 500 has dropped over 9%, driven by concerns over tariffs, inflation, and economic uncertainty in Trump’s second term. Volatility indicators like the VIX have spiked 80% since his inauguration. Analysts urge caution, advising investors to stay diversified as uncertainty remains high with potential further tariffs and economic disruptions ahead.
Wall Street may have initially been happy to see President Trump back in the White House, but less than two months into his second term and the markets are already nearing a dreaded correction.
For a correction to be officially declared, markets must drop 10% from their peak levels. For context, as of yesterday the S&P 500 had dropped a little over 9%.
And with more tariffs—and retaliatory policies—yet to be announced by the White House and foreign governments, analysts are growing increasingly concerned that this downwards spiral will push beyond the correction benchmark.
Already, all of the gains made when Trump won the election have been lost. Initially, markets were buoyed by the end of a period of relative uncertainty as well as the prospect of having a regulation-light figure in the Oval Office.
But rapidly-moving foreign policy has prompted fears over inflation and supply of labor, with the Federal Open Market Committee now hinting it will hold off on any further rate cuts until it has more information.
The cocktail of confusion is enough for markets to lose confidence. At the time of writing the S&P 500 is down 3.62% over the past five days, the Dow Jones down 2.55% and the Nikkei 225 down 2.2% over the same period.
Deutsche Bank economist Jim Reid is buckling in for continued volatility as markets entered “correction territory” yesterday.
In a note seen by Fortune he wrote during the lows of the day markets were “on track to close just over 10% beneath its February peak.”
He added: “However, there was a late risk-on move towards the end of the session, as a retreat from some of the more aggressive tariffs and positive headlines on Ukraine helped markets to recover, with the S&P 500 ultimately avoiding a correction and ‘only’ closing -9.31% beneath its peak.
“But even with that, the latest declines still meant the S&P 500 hit a 6-month low, which is the first time we’ve been able to say that since October 2022.”
Devil in the details
US Bancorp points out that the finer details of the market at the moment paint a bleak picture, highlighting 366 of the S&P 500 stocks have already been trading in correction territory. On top of that more than 200 had dipped as far as bear market territory, with a drop of 20% or more from peak levels.
For example, the Russell 2000 small-cap stock index has dropped by more than 17% since its November 2024 peak.
Another indicator that all is not right in the markets is the the CBOE Volatility Index (VIX) which has spiked more than 80% since President Donald Trump’s inauguration.
While the Wall Street “fear gauge” is not a sure-fire barometer (measuring volatility based on S&P 500 put and call options) it spiked 20% on Monday before settling somewhat a day later.
Rob Haworth, senior investment strategy director for U.S. Bank Asset Management, wrote in a note yesterday: “Uncertainty is the driver around the market’s recent selloff. There are growing concerns about potential economic weakness, due in part to tariff impacts.”
This has been compounded by the president’s somewhat relaxed approach to economic volatility, telling Congress “there will be a little disruption, we’re okay with that.”
“The President’s message seems to be that he’s not worried about the near-term, tariff-induced economic fallout, that’s weighing on the market,” added Haworth. “The slide in smaller stock performance reflects concerns about the economy’s strength. Real interest rates (yields minus inflation) are falling, which indicates a degree of economic uncertainty that’s unsettling the market.”
How to navigate a correction
Amid high levels of uncertainty analysts are advising clients not to act brashly in reaction to ever-changing political narrative.
As Mark Haefele, chief investment officer at UBS Global Wealth Management wrote in a note this morning seen by Fortune: “Our core message remains to stay invested in stocks, with a focus on the U.S., AI, and power and resources, but also hedging those equity exposures to manage near-term risks.
“Trump’s previously threatened 25% effective tariff on all steel and aluminum imports [have come] into effect. With a 2 April deadline for further reciprocal tariffs, uncertainty is set to remain high. Investors should also ensure portfolios are well diversified with assets such as quality bonds, gold, and alternatives.”
While Goldman Sach’s U.S. Equity team flags that S&P corrections often present a good opportunity for buying, it did also caution there are three fairly high bars the market needs to hit in order to recover.
“First, an improvement in the outlook for US economic activity, either due to better growth data or a change in tariff policy,” the team wrote yesterday in a note seen by Fortune. “Second, equity valuations or cyclicals vs. defensives equity market pricing of economic growth that is well below our baseline forecast. Third, depressed investor positioning.”
As a result the team advises its clients to own “insensitive” stocks which are insulated from the factors driving sensitivity (for positive or negative) such as U.S. economic growth, trade policy risk, and AI.
