Following a bull market in 2023 and 2024 that saw total returns of the S&P 500 Index increase by more than 25 percent each year, the climb stalled, and the market reversed course. Two factors appear to be driving the pullback: 1) a correction, which would normally be expected following a period of exceptionally high growth in the value of equities, and 2) uncertainty about whether the new administration’s policies—particularly in fiscal spending and regulatory frameworks—will achieve the stated goal of improving the U.S. economy.
Factors affecting the markets in 2025 include:
- The Impact of Government Spending on the Markets
The new administration appears determined to cut government spending in order to reduce our national debt. Such was the rationale for the establishment of the Department of Government Efficiency, an initiative of the administration headed up by entrepreneur Elon Musk. Cutting government spending is, by nature, deflationary, as it withdraws a substantial amount of capital from the economy over a short period. While such fiscal tightening can prove beneficial for long-term economic stability, it can contribute to near-term volatility as markets adjust to lower liquidity and slower growth. As always, investors should be mindful that periods of transition often create short-term dislocations without necessarily altering the broader trajectory of economic growth.
- The Role of Deregulation
Counterbalancing the effects of reduced government spending is a push for deregulation, which tends to be inflationary. By easing restrictions on businesses, deregulation can spur investment, job creation, and economic expansion. However, the extent to which these benefits offset the deflationary pressures from spending cuts is uncertain. Such uncertainty alone, as does uncertainty created by other factors, can contribute to market fluctuations as investors attempt to price in the net impact of these policies. - Tariffs and Trade
A key strategy of the administration is to use tariffs to increase the cost of imports in favor of goods produced in the U.S. Tariffs can have mixed effects on the economy. While they aim to protect domestic industries, they also increase costs for businesses that rely on imported goods and materials, contribute to inflationary pressures, and disrupt global supply chains. The imposition of tariffs on Canada and Mexico in early March dealt an initial blow to the markets, but as with other market disturbances, short-term losses can present opportunities for long-term gains as markets recover. Also, while punishing other nations with tariffs may raise prices for U.S. consumers, the desired long-term effect is to make U.S. businesses more competitive, which would serve to increase their market valuations.
Looking Ahead: Key Catalysts for Growth
While volatility can be unsettling, it often presents attractive buying opportunities. Market corrections can provide entry points into high-quality assets at more favorable valuations. Historically, disciplined investors who take advantage of such pullbacks tend to perform well over the long run.
Despite near-term market fluctuations, several factors support a bullish long-term outlook:
- Technology-Led Growth: Innovation continues to drive economic expansion, with advancements in AI, cloud computing, and automation fueling productivity gains. According to the World Population Review, the U.S. continues to rank among the most technologically advanced countries in the world, which bodes well for U.S. markets.
- Improved Fiscal Health: If cutting costs results in a more balanced government budget, that will reduce the long-term U.S. debt burden, enhancing economic resilience.
- Tamed Inflation: The current relatively controlled inflationary environment fosters sustainable growth without excessive price pressures.
- Lower Interest Rates: The beginning of a shift toward lower interest rates signals improved borrowing conditions, which will stimulate business investment and consumer spending.
In conclusion, market corrections should not be viewed as signs of weakness, but rather as a natural phase in a maturing cycle. Investors who remain patient and work with their financial advisors to strategically position their portfolios for the next wave of growth stand to benefit from the evolving economic landscape.
Note: As of this writing, maintaining a diversified portfolio has proven beneficial; specifically, bonds and international stocks have been outperforming U.S. equities.
We’re here to help. To discuss positioning your portfolio for the future, contact an HBKS wealth advisor. Contact me at 814-836-5776, or by email at srinn@hbkswealth.com.
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