As you surely know, volatility in the stock market has increased substantially over the last three weeks, with the S&P 500 Index now falling into correction territory, down 10% from its all-time high, and the Nasdaq Composite falling over 15%. In fact, this correction marks only the 17^th time in the last 72 years that the S&P 500 has fallen 7.5% or more from its high in less than three weeks.¹ As everyone also knows, the sell-off has been largely driven by President Trump’s stated tariff policies and the trade war he has initiated with Canada, Europe, China, and Mexico.

Tariffs, at their core, are intended to protect the competitiveness of U.S. companies, promote domestic production, and raise revenue from foreign economic counterparts. However, at their core, tariffs are also inflationary, causing prices to rise for everything, from everyday consumer products and household goods to raw materials and economic inputs. Tariffs are no doubt a volatile, double-edged sword that must be wielded carefully.

In fact, perhaps a larger problem for the market right now than the tariffs themselves is the day-to-day uncertainty on trade policy. Tariff decisions have been made – and changed – at a rapid pace and this whipsaw effect has investors and consumers concerned. It has raised the possibility of a recession later this year and put the Federal Reserve effectively on pause for future interest rate cuts.

Now, putting the tariffs aside for just a moment, it’s important to remember J.P Morgan’s famous answer to the question: “What will the stock market do?” He responded: “It will fluctuate.” As we have had two back-to-back years of 20%+ gains in the S&P 500 Index, 2025 was likely to be a far more volatile year for stocks, with pullbacks and corrections almost a certainty. In fact, this correction in the S&P 500 Index is its first in nearly 18 months, ending back in October 2023.

So, it’s important to put in perspective, at least from a technical level, that the market was overdue for a pullback, and what we are seeing is not unexpected or even unhealthy from a fundamental level. There was froth in the market at the beginning of this year and corrections like these serve the purpose of keeping investors honest.

Unfortunately, almost no one can predict with any confidence the next move of the Trump administration as it relates to tariffs. We could see both sides stand down and come to a trade compromise or experience a further escalation, and markets would probably drop further. Be prepared for this.

Historically, however, President Trump has been sensitive to the performance of the stock market and will be watching the reaction and behaviors of consumers and investors alike. It is also worth noting that every G-20 country has higher average tariff rates than the United States save two, and most countries hide the true costs in expensive barriers like quotas, price controls, labeling requirements, and the like.²

Finally, keep in mind the Trump administration has stated it intends to keep the 2017 tax cuts in place, and further pursue broad deregulation, which the financial markets should like.

Hang in there. Corrections like these are part and parcel of the investing process. Don’t let them impact your long-term investment plan.

Best wishes,

James C. Burns, CFA

President

1 Bespoke Investment Group

2 Zerohedge