What’s Next After a Volatile Week in the Markets?

Key Takeaways

• Fears about slowing growth and uncertainty about tariff policy are stoking volatility and sending stocks lower.
• Bonds have gained ground as investors seek safety in fixed income, while international markets continue outperforming.
• Strategists expect volatility to persist and encourage investors to focus on fundamentals and keep a long-term view in mind.

Investors are being treated to a wild ride, as fears around slowing growth, sticky inflation, and a weakening economic outlook collide with rapidly changing developments in US trade policy. The result is a stock market struggling for direction. The past week saw stocks falling on Monday and Tuesday, regaining ground on Wednesday, sliding again on Thursday, and finding a small bounce on Friday.

The Morningstar US Market Index ended the week down 3.27%. Growth stocks saw even more painful declines, falling 4.91% over the week as tech titans like Nvidia NVDA and Tesla TSLA pulled back. Value stocks fared better with losses of 2.16%. Since the start of the year, stocks have fallen roughly 2.5%, erasing all gains made since President Donald Trump’s victory in the US election in November.

Analysts say stocks will likely keep gyrating until US trade policy becomes more certain. “The market would love to see this back and forth on tariffs stop,” says Steve Sosnick, chief strategist at Interactive Brokers. “Companies in the market could deal with pretty much most outcomes. It’s just a question of what [those outcomes are]. Markets hate uncertainty, and we’ve got nothing but uncertainty on the tariff front.” Combine that with an uncertain outlook for inflation and Federal Reserve policy, and you have a recipe for a stock market in wait-and-see mode.

Bonds Regain Ground

As stocks churn, the bond market has rallied as investors seek safety in risk-off assets. The yield on the 10-year Treasury note has fallen to 4.28% from its peak of 4.8% in mid-January. Bond prices move in the opposite direction of yields.

“We’re moving away from focusing entirely on inflation, and now there are concerns about the growth outlook,” explains Blake Gwinn, head of US rates strategy at RBC Capital Markets. That’s fueling a return to the classic negative correlation between stocks and bonds. Morningstar funds reporter Gabe Alpert recently explored how bonds have outperformed equities over the past few weeks.

Why Are Markets Down?

Janus Henderson Investors portfolio manager Adam Hetts attributes this week’s market action to ongoing softening growth signals (lower consumer spending and confidence, slowing manufacturing activity, and lower investor sentiment), combined with policy uncertainty and the potential threat tariffs pose to growth. Tariffs are also likely to exacerbate inflation, at least in the short term.

On Tuesday, new 25% tariffs took effect on imports from Canada and Mexico, along with a further 10% tax on imports from China. On Wednesday, Trump delayed levies on automakers, and then on Thursday, he pared back some tariffs on Canada and Mexico for an additional month. He has signaled that reciprocal tariffs and tariffs on other major imports like steel and aluminum will still go forward.

“I think the market was looking past tariffs, but this week they were actually put in place,” Hetts says. He adds that these negotiations are still fluid, but the major hiccup in the outlook was enough to “roil markets on top of the economic data outside of tariffs.”

It’s a stark contrast with the optimism that fueled markets after Trump’s election, when stocks surged higher on the prospect of a pro-business, pro-growth administration. In the last few weeks of February and into this first week in March, “you started to see that optimism unwind because of the chaos around announcements and policies coming out of the administration,” says Gwinn. He thinks that in an environment like this, “markets are much more likely to grab onto any kind of negative data and much more likely to dismiss anything on the positive side.”

Along with two major inflation reports next week, Sosnick says markets will closely watch data on consumer sentiment for further signs of weakness.

Silver Linings Remain

Hetts says that despite last week’s stumble, a longer-term perspective can offer investors a silver lining. Markets are still up double digits over the past 12 months; the US Market Index has returned 13% over that period.

Hetts also points to bright spots in international markets like Europe and China, which have significantly outperformed US stocks since the start of the year. And while mega-cap tech stocks are stumbling, they’re also getting cheaper compared with their stretched valuations only a few months ago. “There’s a balanced, mixed picture when you zoom out a step or two,” Hetts says.

Sosnick says he’s recently favored dividend stocks, which tend to be insulated from dramatic moves in the overall market.

Analysts say there are still plenty of signs of economic strength. Consumers are still spending despite weakening sentiment data, and the labor market is holding up. “I don’t see any fundamental weaknesses in the economy that are signaling a problem yet,” Gus Faucher, chief economist for PNC Financial Services Group, recently told Morningstar.

How to Navigate Volatility

While volatility and policy uncertainty will likely persist in the short term, strategists recommend investors keep a cool head. “The challenge is to avoid overreacting to the elevated day-to-day volatility and ensure they stay stick to their financial plan,” says Dominic Pappalardo, chief multi-asset strategist for Morningstar Investment Management.

Morningstar chief US market strategist David Sekera advises investors to “focus on the fundamentals, maintain a long-term mindset, and pay attention to valuations,” He says that with headlines coming fast and furious, it’s important to separate meaningful signals (developments that may affect a company’s bottom line or fundamental outlook) from the noise.

Given market conditions, Sekera recommends investors overweight small caps, value stocks and core stocks, which are trading at a discount, and underweight large cap stocks and growth stocks.

Sosnick adds that while selloffs will produce bargains, investors shouldn’t buy just because stocks look less overvalued. “It behooves investors to make sure they’re paying a reasonable price.” That’s especially true when markets are choppy. “When the markets get volatile, as they are now, it means there’s a lower risk tolerance. Investors should act accordingly. Don’t chase things. Use discipline.”