John Gorlow
| Mar 17, 2025
Markets remain in a state of uncertainty and volatility, grappling with conflicting signals from economic data, shifting policies, and geopolitical tensions. U.S. stocks have stumbled, yet bond markets remain strikingly calm, offering a stark contrast in investor sentiment. While concerns over tariffs, government spending, and regulatory overhauls cloud the economic outlook, inflation data and labor market strength continue to suggest resilience.
Despite the turbulence, the market snapped back, with a broad rally lifting the S&P 500 by 2% on Friday—its biggest single-day surge in months. This came just a day after the index officially entered correction territory, having fallen more than 10% from its record high. The rally followed the passage of a key spending bill, fueling optimism that Washington had sidestepped another fiscal crisis. Yet, even with that rebound, U.S. stocks notched their fourth consecutive weekly decline—their longest losing streak since August—underscoring investor fragility.
While markets digest political uncertainty, economic fundamentals are also flashing warning signs. Consumer sentiment has taken a sharp hit, with the University of Michigan’s closely watched index tumbling another 11% in mid-March to 57.9, its lowest reading since Trump took office. Americans are growing increasingly anxious over what tariffs, government layoffs, funding cuts, and new immigration restrictions might mean for the broader economy.
Meanwhile, Wall Street remains on edge as shifting trade policies inject fresh volatility into financial markets. The Federal Reserve’s upcoming decision on interest rates—expected to remain unchanged at 4.25-4.50%—will be closely watched for signals on how policymakers interpret the mixed economic outlook. Some investment banks have already trimmed their growth forecasts, with Goldman Sachs lowering its 2025 U.S. GDP estimate to 1.7% from 2.4%, while Barclays slashed its projection to a mere 0.7%.
For professional allocators considering tactical capital deployment, one question looms: Has the sell-off run its course, or is there more downside ahead? The reality—there’s no way to know. Markets move fast, reacting to headlines, policy shifts, and corporate surprises. But volatility breeds opportunity—if you’re prepared to act.
Trump’s Economic Contradictions and the Market’s Unease
The source of today’s market volatility lies not just in economic fundamentals but in the unpredictable nature of U.S. policy under Trump’s second term. The Financial Times recently described Trump’s economic agenda as a mix of incoherence and contradiction, reflecting a landscape where policy shifts seem reactive rather than strategic. The policies coming out of the White House lack a unifying economic theory, which may explain why markets are responding erratically to each new headline. Tariff revenues are meant to fund tax cuts, but if imports shrink, so does the tax base.
While Trump's economic agenda has been described as unpredictable and contradictory, his administration has also been actively engaged in international diplomacy. Recent discussions with Russia over Ukraine, negotiations involving France and Germany, and outreach to allies and adversaries alike suggest an attempt—however unconventional—to navigate complex geopolitical challenges. Whether these efforts result in lasting resolutions or merely heighten global uncertainty remains to be seen, but they undeniably factor into the broader market landscape.
Diplomatic maneuvering, after all, can influence investor sentiment just as much as economic fundamentals. Markets weigh the risks of trade disruptions and policy shifts alongside potential geopolitical realignments. If Trump’s negotiations lead to trade concessions or de-escalation of global conflicts, they could provide a counterbalance to some of the uncertainty his economic policies have introduced. However, if they falter or create new instability, markets may struggle to price in the full range of risks.
The Expansion of Government Power: A New Market Concern?
As Steven Levitsky and Lucan Way highlight in Foreign Affairs, the consolidation of executive power isn’t just a political shift—it’s an economic risk. Trump’s reinstatement of Schedule F strips civil service protections from thousands of federal employees, allowing the administration to replace career professionals with political appointees. If implemented, this could transform regulatory and enforcement agencies—including the Internal Revenue Service (IRS), the Securities and Exchange Commission (SEC), the Department of Justice (DOJ), the Consumer Financial Protection Bureau (CFPB), the Financial Industry Regulatory Authority (FINRA), the Federal Reserve (The Fed), the Department of the Treasury, and the Federal Trade Commission (FTC)—into instruments of political influence rather than neutral economic stewards, among others.
When government power expands unchecked, economic decisions risk becoming political. Competition weakens, inefficiencies grow, and investment hesitates. If firms must align with political preferences to operate freely, market-driven decision-making gives way to regulatory uncertainty and favoritism. While markets may have yet to fully price in these risks, expanding executive authority could create lasting economic distortions.
A Geopolitical Realignment: The Shifting World Order
Hal Brands, professor of global affairs at Johns Hopkins and senior fellow at the American Enterprise Institute, describes Trump's foreign policy as transactional, nationalist, and disruptive—less about defending democracy, more about striking deals that prioritize U.S. advantage. This approach presents both extraordinary risks and opportunities, reshaping the global order in ways that could redefine economic power, alliances, and stability.
For decades, the Western-led global system—anchored by U.S. military leadership, NATO’s security umbrella, and multilateral cooperation—has served as the foundation of global stability. It has deterred authoritarian expansion and fostered economic interdependence. But this framework is under strain, and Trump’s return to power could accelerate its fragmentation.
Europe, long reliant on U.S. security commitments, is now being forced to chart a more independent course as NATO cohesion weakens. A Trump-brokered resolution in Ukraine could bring an end to the war—but at what cost? If it legitimizes Moscow’s territorial ambitions, it could reinforce the belief that military aggression delivers results. Meanwhile, U.S. retrenchment in Asia and the Middle East is emboldening China, Iran, and other revisionist powers, heightening the risks of geopolitical instability.
At the same time, Trump’s transactional approach to foreign policy could create economic openings. His willingness to challenge global norms may force economic concessions from Beijing, reshape energy markets, and recalibrate alliances to better serve U.S. interests. The challenge for investors is that this geopolitical shift is not just a policy adjustment—it’s a structural transformation that could redefine global markets for years to come.
The challenge for investors is recognizing that geopolitical volatility is now a defining feature of the landscape. Trade wars, shifting security commitments, and evolving global alliances aren’t just policy swings; they are structural forces reshaping the global economy.
The takeaway isn’t to time the headlines but to maintain adequate diversification in a world where economic power centers are shifting. While geopolitical dislocations create both risks and opportunities, broad global exposure ensures investors remain positioned for long-term stability rather than short-term speculation.
Debt, Deficits, and the Limits of Fiscal Policy
Every economic cycle has its limits, and for the U.S., debt is testing them. With national debt now exceeding $35.8 trillion (127% of GDP) and deficits on track to balloon from $1.7 trillion in 2026 to $2.5 trillion by 2035 (CBO), Washington is running out of fiscal runway just as economic uncertainty deepens.
At the same time, the administration is banking on tax cuts—positioning them as a catalyst for growth. But with interest costs already eating up 16% of federal spending (Fiscal Data), markets are weighing a different risk: whether piling on more debt could push borrowing costs higher and tighten financial conditions when growth slows.
Investors aren’t blind to these risks—they’ve seen the debt trajectory for years. But what markets may not fully reflect is the administration’s bet that Wall Street will embrace more tax cuts, even at the cost of fiscal instability. If the market’s tolerance for deficits proves lower than expected—or if recession fears accelerate—sentiment could shift fast, leaving policymakers with fewer tools to soften the landing.
Long-Term Thinking in an Uncertain World
Markets are in flux—stocks struggle while bonds remain steady, economic signals are mixed, and political uncertainty amplifies volatility. Conviction is tested, patience feels unrewarded, and the temptation to react grows stronger.
Yet history shows that markets absorb information relentlessly. Prices adjust constantly—sometimes before the full picture emerges, sometimes long after. Trying to outmaneuver markets is a longshot, and attempts to do so often lead to costly mistakes, missed opportunities, and shortfalls in returns.
The better approach: Stay the course. A well-built strategy isn’t about reacting to every shift—it’s about staying positioned for long-term success. Uncertainty comes and goes, but a strong, disciplined approach keeps you focused and leads to more reliable outcomes.
If we haven’t spoken recently or if you’d like to revisit your portfolio’s positioning, let’s connect.
Regards,
John Gorlow
President
Cardiff Park Advisors
888.332.2238 Toll Free
760.635.7526 Direct
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February Market Overview: Mixed Signals, Diverging Paths
Despite reaching two closing highs, U.S. stocks ended February lower, with the S&P 500 slipping more than 1% as market volatility remained elevated. Meanwhile, international equities outperformed, with both developed and emerging markets posting gains. U.S. bonds continued their upward momentum, delivering a second consecutive month of positive returns.
Sector performance was uneven. Defensive sectors such as consumer staples and real estate advanced, while cyclical sectors, including consumer discretionary and communication services, lagged. In contrast, European equities saw notable strength, buoyed by positive earnings revisions, while emerging markets edged higher despite ongoing geopolitical uncertainty.
Interest rate expectations remained in focus. Futures markets currently anticipate the Federal Reserve holding steady until at least June, with a 54% probability of a 25-basis-point cut mid-year. The Bank of England moved ahead with a rate cut in February, and expectations are growing for further European Central Bank easing amid sluggish growth.
Inflation trends showed mixed signals. In the U.S., headline CPI rose for the fourth consecutive month, while core inflation also ticked higher. The U.K. saw a sharp acceleration in inflation, whereas eurozone inflation eased slightly in February.
From a style and size perspective, most U.S. equity categories declined. Large-cap stocks held up better than small caps, and value outperformed growth across the board. The same trend played out in international markets, where large-cap stocks outpaced small caps, and value maintained an edge over growth.
In fixed income, U.S. Treasury yields continued to decline, supporting another strong month for investment-grade bonds, which returned more than 2%.
U.S. Stocks: A Mixed Performance with a Value Tilt
Through the end of February, the U.S. stock market saw broad declines across most size and style categories. Large-cap stocks fared better than small caps, which posted steeper losses. Year to date, large caps managed a slight gain of just over 1%, while small caps remained in negative territory, down nearly 3%. A key trend throughout the month was value outperforming growth across the board. Large-cap value stocks, in particular, stood out, rising 5% year to date—making them among the strongest performers.
Non-U.S. Developed Markets: Strong Performance Continues
Non-U.S. developed markets outperformed U.S. stocks in February, extending their lead on a year-to-date basis. Gains were broad-based, with all key size and style indices in positive territory for the year.
Large-cap stocks led the charge, outperforming small-caps, which saw a slight decline in February. Year to date, large-cap stocks have surged more than 7%, significantly outpacing their smaller counterparts.
Value stocks continued their dominance, outperforming growth stocks for both the month and the year. Large-cap value stocks emerged as the top performers year to date, posting an impressive 9% gain.
With economic momentum building outside the U.S., non-U.S. developed markets have remained a bright spot in global equities, reinforcing their role in a well-diversified portfolio.
Emerging Markets: Modest Gains with a Value Edge
Emerging markets posted slight gains in February, bringing year-to-date returns to just over 2%. However, performance varied significantly across size and style categories.
Large-cap stocks outperformed small caps, continuing a trend seen across global markets. Year to date, large-cap stocks have gained 2.5%, while small caps have struggled, falling more than 5%.
Value stocks led the way, outperforming growth stocks across all size categories. Large-cap value stocks stood out as the top performers, rising nearly 2% in February and gaining 3% year to date.
Fixed Income & Interest Rates
U.S. bonds delivered their second consecutive monthly gain in February, supported by declining Treasury yields amid softer economic data and ongoing tariff uncertainties. The Bloomberg U.S. Aggregate Bond Index rose more than 2%, pushing its year-to-date return close to 3%. Mortgage-backed securities (MBS) led fixed income performance, outperforming other bond sectors.
Treasury yields broadly declined across the curve, reflecting concerns over tariff policy uncertainty, a softening housing market, and rising initial jobless claims. The 10-year Treasury yield dropped 32 basis points to 4.22%, while the 2-year Treasury yield fell 21 basis points to 4.01%.
Credit markets saw modest spread widening in February. Investment-grade corporate bonds advanced but trailed Treasuries and MBS, while high-yield corporates posted slight gains but underperformed investment-grade bonds.
Inflation data continued to shape market expectations. Headline and core CPI ticked higher in January, but the Fed’s preferred measure—core PCE inflation—cooled to 2.6% from 2.9% in December, moving closer to the central bank’s 2% target. Market indicators suggest the Fed will maintain its wait-and-see approach, with rate cuts not expected until mid-year.
Municipal bonds advanced in February but lagged the broader Treasury market, while long-term inflation expectations edged lower. Treasury Inflation-Protected Securities (TIPS) finished the month in line with nominal Treasuries, reflecting a stable inflation outlook.
With yields retreating and policy expectations evolving, fixed income markets remain in focus as investors weigh rate cuts, inflation trends, and broader economic momentum.