Banks including Goldman Sachs Group Inc. and JPMorgan Chase & Co. can thank the White House’s aggressive disruptions on tariff policy and other issues for record hauls from equities trading in the first quarter, when market volatility began to surge. Yet some lenders found weak loan demand, increased provisions for credit losses and reduced deal revenue weigh on earnings.
Bank trading revenue has a dark side, too, where every dollar market makers collect is money investors pay. Moreover, the volatility that allows professional traders to multiply profits reduces the attractiveness of securities to long-term investors. Finally, volatility can lead to credit losses and economic underperformance, damaging banks’ prospects in the medium term and even leading to bank failures.
The cyclically adjusted price-to-earnings (CAPE) ratio of the S&P 500 Index has dropped from 38 when President Donald Trump was inaugurated to 33 on Thursday. Applied to the entire US equity market, that’s an $8 trillion decline in equity valuation relative to earnings. Investors are clearly anticipating slower earnings growth than they did in January and applying a higher discount rate to the more volatile cash flows.
All the factors driving these trends have accelerated in April, so there are good reasons to expect 2025 to be a wild ride for investors.
Hedge funds, for example, have struggled amid the turmoil. The Barclay Hedge Fund index was basically flat (up 0.05%) for 2025 through the end of March. Hedge funds tend to be naturally short volatility — they make money when volatility falls and lose money when it rises — but, like bank traders, they can take opportunistic advantage of active trading by institutions and individuals. Those two effects seem to be offsetting for now.
What do retail investors do in this environment? The causes of market turbulence change from year to year, but the advice for riding out storms remains the same.
- Adjust your volatility exposure before the crisis, not during. Stocks are down about 10% for 2025, which can make it painful to reduce equity exposure. But traders know your first loss is your least loss. If the declines have reminded you that you cannot tolerate large losses in your equity portfolio, act now, not after markets are down another 10% or much more.
- Diversify; it’s the only free lunch in finance. Perhaps no sector is safe, but having a mix of different types of stocks, plus fixed-income investments, real assets, foreign assets and crypto, etc. lowers the volatility in your portfolio without sacrificing the expected return.
- Look for value: That list includes stocks of profitable companies with solid balance sheets that pay dividends or buy back stock, real assets with clear economic worth, currencies that pay high real interest rates, and things that people value even in bad economic times. You can’t avoid the wild swings in prices, but you can hold a portfolio anchored in cash flows and useful assets rather than hopes and dreams and fears.
While we should be humble assigning the causes of market swings immediately after they happen, a large factor worrying investors seems to be that Trump has been moving faster and more aggressively to fulfill his campaign pledges.
Trump has partially walked back on tariffs, and this did calm markets somewhat, but it really makes things less predictable. Perhaps it means Trump will revert to the more cautious approach of his first term, but it could equally well mean we’ll have plenty of shocks and reversals. Most recently, Trump seems to have shifted focus from tariffs to interest rates saying Fed Chair Jerome Powell’s termination from his position can’t come quickly enough, and that he should have lowered rates already this year. Moreover, Trump is not in control of events; we have yet to see the fallout as his tariff actions to date provoke global reactions.
The Cboe VIX Index — a measure of expected S&P 500 volatility — climbed to this year’s high of 52% in April from 16% on Jan. 20. While 52% is not as high as the extreme levels of 81% seen during the 2008 financial crisis or 83% at the onset of the Covid pandemic in March 2020, it’s higher than any other period since the VIX was introduced in 1990.
Of course, all of this may blow over. It’s good to remember that when the VIX jumps over 30%, its average value over the subsequent 12 months is only 23% — not much higher than its overall average of 19%. There are lots of ominous weather reports in financial markets, not many perfect storms. But even if you have a crystal ball to tell you markets will be calm for the rest of the year, you will benefit by adjusting your portfolio to your proper level of risk, diversifying and making sure you own value. Banks have the balance sheets to weather market storms and even benefit from them, it’s individual investors who often pay a price.
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