Market Volatility, A New Trade Regime and How You Should Respond

“All declines are temporary, and merely an interruption of the permanent advance. Thus, the market is incapable of inflicting permanent loss on the adequately diversified long-term investor."

Nick Murray

Market Volatility

Conventional wisdom says to stay the course. While Watershed delivers diversified, rules-based investing strategies that help lessen the blow on brutal days like today, we want to take this moment to help clarify what is happening and what to do about it. 

President Trump’s tariff blitz announcement on Wednesday afternoon caused a sharp selloff across most equity markets leading to steep losses on Thursday and early Friday morning.

New Trade Regime

As the economic and market impact shakes out in the coming days and weeks, consider the following themes:

- Posturing: Tariffs are both an opening bid for negotiations and a policy approach. Targeted concessions are expected for many countries, and we foresee the average effect rate to be much higher.

- Inflation: The tariff blitz pressures inflation meaningfully to the upside, and growth to the downside. This puts the Fed in a box. Until unemployment wanes or we experience tighter financial conditions, growth is threatened.

- Economic Slowdown: The risks of higher inflation and lower growth are now real. The risk of recession only increases should tariffs stick.

Across the economy, the outlook is for slower growth. Recession is by no means certain. However, a slower economy is rather like a slow-moving bicycle – the slower its moves, the easier it is to fall over.

Recent History

From late 2018 through August of 2019, markets experienced three corrections of more than 5% (-20.2%, -7.6% & -6.8%) which were all attributed to similar themes around tariffs, recession fears, global slowdown and trade wars. Volatility like this happens regularly and often for the same reasons. Time-tested: the market always finds a way to recover

Watershed Response

Watershed’s portfolio team rebalanced several times in the last few months. Going back to September leading up to the election, again in November after Trump was elected, then January and March given the heightened volatility in 2025. Risk management remains paramount when stocks are in flux.

In recent days, the market has been responding with a certain fury. Against this backdrop, we firmly believe investors should take the opposite approach by reacting slowly and calmly. That’s a tall order. Giving into panic means selling when prices are dropping, then buying at a higher price point—the exact opposite of what investors want.

It is easy to forget the S&P 500 hit record highs in the past two calendar years, returning roughly 23% in 2023, and 25% in 2024. Giving up some of those gains could be seen as an opportunity for some investors who have been holding onto excess cash.

With all investing, we emphasize quality. We believe our strategies have been performing as we would expect and providing protection when things get rough. It is impossible to time the bottom, but this could turnout to be an opportunity for those who keep a calm head while others run scared.