Equity volatility has picked up in recent weeks, driven by uncertainty over tariffs/trade policy and signs of a weakening U.S. economy. After starting 2025 on strong footing, U.S. equities sold off in February and the pace of decline has accelerated early in March. The tech-focused NASDAQ Index was down about 10% from its peak yesterday. As of March 6th, the S&P 500 is down 2.2% year-to-date (YTD) and small caps have dropped 7.2%. The CBOE Volatility Index (VIX) is up to 24 from about 16 at the beginning of 2025 and at its highest level since early 2023.
Benefits of Diversification
1) While moves in the NASDAQ Composite and S&P 500 Index tend to gather most of the headlines in the U.S., many other parts of portfolios continue to perform well. Much of the recent selloff has been in large-cap tech stocks that have gotten more expensive over the past two years.
- Within U.S. stocks, the Russell 1000 Value Index is up 1.9% YTD and quality stocks have held up with the U.S. Dividend Achievers Index up 0.7% YTD.
- International stocks are positive on the year with MSCI EAFE (the international developed market index) up 11.2% and emerging markets gaining 5.5%. The weakening of the U.S. dollar has helped the return of these investments for U.S. investors.
2) Risk-off sentiment has led to a precipitous decline in Treasury yields. The 10-year Treasury yield peaked around 4.80% in mid-January and has fallen to 4.3% today. The decline in yields has led to a 2.3% increase in the Bloomberg US Aggregate Index YTD.
3) Alternative investments like private credit and real estate are also positive YTD and can provide stability to a portfolio.
Perspective
1) Some selloff in U.S. large-cap stocks is not unexpected given that they have gained over 20% each of the last two calendar years and become expensive based on their price-to-earnings ratio.
2) While we have not had significant drawdowns in U.S. large-cap equities over the past couple of years, investors should remember the volatility inherent in investing in equities. The average intra-year decline in the S&P 500 is over 14% over the past 45 years.
Source: J.P Morgan as of 2/28/25
Conclusion
Investors should exercise patience while the dust settles. Diversification can be an investor’s best friend, particularly in times of turmoil. Sunpointe continues to advocate for diversification across asset classes, sectors, market capitalizations and styles, and a rebalancing plan that adheres to long-term strategic objectives. While it is difficult to not dwell on daily equity market moves, investors should ensure that their long-term strategic investment portfolios are properly aligned with their goals and commensurate level of risk.
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