Trump Trade War II & Market Volatility: What Smart Investors Should Know

Market Chaos and Trade War Fears: What’s Driving Volatility?

The stock market in 2025 has been experiencing significant volatility, largely driven by escalating trade tensions linked to a new wave of Trump tariffs. Investors are grappling with uncertainty, questioning whether this is the start of a bear market or just another news-driven correction. This article dives deep into the evidence, separating fear from fact, and exploring what’s next for the stock market.

Strategic vs. Tactical Investing: How to Navigate Market Uncertainty

At times of high volatility, having a robust investment strategy is crucial. Investors can benefit from understanding two distinct approaches:

• Strategic Models: These remain fully invested based on risk profiles, adjusting only the internal mix of assets (e.g., moving from growth stocks to defensive sectors). Currently, these models maintain exposure but have shifted towards short-term T-bills due to poor bond performance.
• Tactical Models: These trend-following models adjust based on market direction. Currently, they are heavily invested in cash and short-term bonds, with only 6-28% in stocks, as they wait for clearer signs of market stability.

Why Diversifying Between Strategies Matters

If markets rebound quickly, strategic models benefit from constant exposure. However, if markets grind lower, tactical models protect capital by reducing risk. This dual approach helps balance potential returns against downside risk.

Are We Entering the Danger Zone? Key Market Levels to Watch

Technically, the market has broken key support levels, entering what analysts call the danger zone. After violating spring 2024 highs, attention now turns to the spring 2024 lows as a critical floor. The market’s ability to hold above this level could signal either:

• A short-term bottom, offering a buying opportunity.
• Or, a deeper decline, confirming a new downtrend.

These levels are essential for determining when to re-enter or further reduce exposure.

The VIX and Fear: Market Bottom or More Pain Ahead?

The VIX, known as the fear index, recently spiked above 60, a rare event indicating extreme investor fear. Historically, such spikes often precede strong market rebounds, but not always.

• In bear markets (2001, 2008), VIX spikes signaled more downside.
• In bull markets (2020, 2011), similar spikes marked market bottoms.

Currently, the VIX’s surge may hint at potential upside, but it’s crucial to wait for confirmation.

Historical Patterns: Big Drops, Bigger Opportunities?

When analyzing major two-day market declines since 1950, the data shows:

• Post-decline 1-year returns have been positive 100% of the time.
• The average return after such drops exceeds 20% over 1 year.

This pattern suggests that while short-term fear dominates, long-term investors often see these drops as buying opportunities.

The Power of Market Breadth: Why Fewer Stocks Above Key Averages Matters

Currently, fewer than 25% of S&P 500 stocks are above their 200-day moving averages. Historically, this has signaled strong 12-month returns, with only one exception in 2008. This breadth indicator reinforces the idea that panic selling often precedes recovery.

Trade War Headlines: Noise or a Real Threat?

The Trump Trade War II has triggered widespread concerns, but is it different this time? Market moves are often driven by buying vs. selling enthusiasm, not just fundamentals. With corporate America and individual investors fearful, selling pressure has intensified.

Yet, history shows that news-driven sell-offs—from COVID to tariffs—often reverse as panic fades.

Positive Catalysts on the Horizon

Despite fear, several positive developments could support markets:

• Potential tax cuts on Social Security and overtime pay.
• Interest rate cuts: From one expected cut to potentially four cuts in 2025.
• Domestic vehicle tax incentives.
• Lower borrowing costs for mortgages, personal loans, and student debt.

These factors could provide economic support and improve market sentiment.

Key Takeaways: Stay the Course, Stay Informed

• Volatility is normal: Markets breathe, and corrections are part of long-term growth.
• Fear creates opportunity: Extreme fear often marks the start of recoveries.
• Strategy matters: Diversify between strategic and tactical models to balance risk and return.
• This is temporary: Unless we’re facing total collapse (which history suggests is unlikely), markets will recover.

Final Thought: Buy When There’s Blood in the Streets

As Baron Rothschild famously said, “Buy when there’s blood in the streets, even if it’s your own.” Fear can be paralyzing, but with careful analysis and discipline, investors can position themselves for long-term success.