4 Reasons Why Market Volatility Could Be Different This Time

In the world of finance, we often preach that market volatility is normal and that, historically, markets always recover in the long run. And that’s generally true.

But lately, I’ve been pondering a crucial question: What if this time really _is _different?

We’ve certainly seen our share of market downturns throughout history, each triggered by a unique set of circumstances. Think back to 9/11, a horrific tragedy that shook the nation and the markets. Or the savings and loan crisis of the late 1980s and early 1990s, which stemmed from deregulation and risky lending practices.

Fundamental Shifts Bring Volatility

However, some fundamental shifts are happening now that make me wonder if the standard advice might need a serious asterisk. Here are four reasons this market volatility could indeed be different:

1. Far-Reaching and Deep Changes to the US Economy

The transformations we’re witnessing in the US economy are not minor tweaks; they are significant restructurings with potentially long-lasting consequences. We’ve seen substantial job losses in various sectors, and simultaneously, critical government institutions have faced significant budget cuts and personnel reductions. For example, funding for the Social Security Administrationdirectly affects its ability to efficiently process claims and provide essential services to millions of retirees and disabled individuals. Similarly, reduced funding for the Internal Revenue Service can lead to decreased tax enforcement, potentially affecting government revenue and the fairness of the tax system. Cuts to medical research at the National Institutes of Healthcan slow the development of crucial treatments and cures, with long-term implications for public health. Furthermore, decreased investment in health and welfare programs can exacerbate social inequalities and create economic instability for vulnerable populations. These aren’t easily reversed trends; they represent a fundamental shift in the government’s role and priorities.

2. Shifting Global Alliances

The realignment of our country’s alliances is a significant departure from decades of established foreign policy. Moving away from long-standing partnerships with NATO allies, key European nations, and our close neighbor Canada—our largest trading partner—in favor of closer ties with countries like Russia, El Salvador, and others fundamentally alters our geopolitical standing. This isn’t just a temporary diplomatic hiccup; it reshapes our economic relationships, our security framework, and our influence on the world stage. Such a significant shift creates uncertainty and instability, which are not conducive to robust and predictable market behavior.

3. Instability of Tariffs

The repeated imposition, threatening, and pausing of tariffs can inflict permanent damage on international trade and supply chains. Think of it like “The Boy Who Cried Wolf.” While individual tariffs might have short-term impacts, the constant uncertainty erodes trust and encourages other nations to seek more stable and reliable trading partners. The European Union, Canada, Australia, and many other countries collectively represent a massive global market. They absolutely possess the capacity to thrive without significant trade with the US. However, considering that, in 2023, the US’ total trade in goods and services amounted to over $6.6 trillion (US Census Bureau), a significant disruption in these relationships would have profound negative consequences for the US economy. Businesses need predictability to invest and plan, and the erratic nature of tariff policies undermines that stability.

4. Erosion of Constitutional Norms

The suggestion of the executive branch controlling both Congress and the courts, or worse, disregarding court orders, strikes at the very foundation of our democratic and capitalist society. Our economic system thrives on the rule of law, the separation of powers, and the stability provided by constitutional precedent. For capital markets to function “rationally,” there needs to be a solid and predictable framework. The undermining of constitutional norms introduces a level of systemic risk that is unprecedented in recent history. If the fundamental structures of our government are perceived as unstable or illegitimate, it erodes investor confidence, both domestically and internationally, and can lead to a significant market correction as investors seek safer havens.

What Investors Can Do

So, what can advisors and investors do in the face of these potential shifts? On an individual investment level, it’s prudent to consider strategies that can help mitigate these risks. This might include increasing the diversification of your investment portfolio to include a greater allocation to international assets, exploring ways to hedge against potential US dollar weakness, and ensuring your emergency cash reserves are fully funded to weather any unexpected economic storms.

These are unsettling times, and the traditional financial wisdom might need to be viewed through a different lens. It’s crucial to stay informed, think critically, and prepare for a range of potential outcomes. This time could be different, and it’s our responsibility to acknowledge that possibility and plan accordingly.