Markets – March 2025

The biggest losses were stocks in the tech sector and financials. Still, most sectors were caught up in the sell-off, including defensive areas of healthcare, utilities, and non-discretionary retailing (supermarkets, etc).

The S&P 500 Index recently dropped below its 200-day moving average – a key long-term trendline – for the first time since late 2023, when concerns about a potential US recession were last raised.

Market volatility can be attributed to uncertainties around the new US administration’s policies, particularly around trade and tax changes. Analysts and investors are grappling with what this means for consumers, inflation in the economy, global trade, and the uncertainty around retaliatory trade policies from the US’s major trading partners.

Trump won’t want the distraction of a recession

I believe Trump won’t want a recession during his second term. Recessions distract governments from their core agenda, destroy government revenues, and could weaken his party’s grip on both houses during the mid-term elections.

Trump was often distracted during his first term by the pandemic, a situation he would prefer to avoid in his second term. 

The US deficit keeps on growing

The US budget deficit totalled US$307 billion in Trump’s first full month in office of this term, up 4%, ($11B) from a year ago. The deficit for the first five months of the US fiscal year came to $1,147 trillion, up 38%. This was $318B higher than a year earlier.

Receipts rose 2% to a record $1,894 trillion, but outlays grew 13%, to another record $3,039 trillion.

Trump inherited a federal budget deficit that is running at unsustainable levels. His primary aim with tariffs is to raise sufficient revenue to allow his administration to implement its policies without the budget deficit deteriorating any further. Put simply, Trump needs the revenue.

Is it a correction or a recession?

This week, JP Morgan’s chief global economist raised the expectation of a US recession to 40%, up from about a 30% chance he had anticipated in January.

Last week 95% of economists surveyed by Reuters in Canada, the US, and Mexico, said the risk of recession in their economies has increased due to Trump’s tariffs.

The high level of uncertainty creates an environment where short-term risks are harder to manage. This makes investors more cautious and less willing to commit their capital. They increase their risk-off positioning, sell down equities and move capital towards more defensive assets, like bonds, infrastructure, and property.

Sitting out market corrections is the best approach

Investors should sit it out if it’s a market correction – but be prepared to adjust portfolios should a recession occur.

Market corrections (a fall of between 8% to 10%) usually happen once every year. But given the strong performance of US equity markets over the last couple of years, this has not occurred since the pandemic.

Specific sectors, particularly tech and financial stocks, have been overvalued. Over the last few months, they have been unwinding.

For now, investors should stay the course – but the market could be in for a bumpy ride over the next few months.