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IT’S BEEN AN UNUSUAL year—to say the least—for investment markets. After rising earlier in the year, U.S. stocks and bonds have dropped in recent weeks. Market leaders like Apple and Nvidia have been among the hardest hit. The U.S. dollar has also dropped, helping boost the value of international shares, and gold has continued to hit new all-time highs, despite inflation cooling.
What can we learn from all this? I see seven lessons.
1. There are no guarantees. After the November election, the expectation was that the second Trump administration would look a lot like the first, when tax cuts and other policies boosted share prices. With this as the consensus expectation, markets rose after the election and continued to rise into 2025’s early months.
But those expectations missed the mark. While tariff increases were expected, they’ve been much more significant—and thus more damaging—than anyone expected. And with the White House, Senate and House all aligned politically, the expectation was that Washington would move quickly to extend the tax cuts that are set to expire at the end of this year. Not only has that legislation moved slowly, but also there’s news that Republicans are considering raising rates on some taxpayers, imposing a new, higher bracket on those earning more than $1 million.
These policy shifts are a reminder that, even when everyone seems to agree, things can change. That’s why I believe it’s best never to go too far out on a limb with investment choices. Nothing is guaranteed.
2. Economics is not a science. The challenge with economics is that it’s only sometimes right. It’s more reliable than astrology, but it’s not chemistry or physics. In economics, sometimes things go according to the textbook, but sometimes they don’t.
Consider what we’ve seen this year. Owing to the trade war, the stock market has dropped. That makes sense. But the bond market’s reaction has run contrary to expectations. Usually, when investors become fearful, they seek out the safe haven of the bond market, and especially the security traditionally offered by U.S. Treasurys.
But that’s not what we’re seeing now. Treasury bond prices have dropped. And because interest rates are the flip side of bond prices, we’ve seen interest rates rise, making life more expensive for everyone from car buyers to home purchasers. That’s added to the environment of uncertainty and is definitely not what standard economics would have predicted.
3. Bad news isn’t the worst thing. Bad news definitely doesn’t help stock prices. But this year, we’ve seen something even worse: Uncertainty, it turns out, is often the worst thing for share prices. When it isn’t clear where the economy is headed, some investors will choose to sell and to sit on the sidelines until there’s resolution. That can lead to a prolonged period of malaise. By contrast, with bad news, the market tends to adjust and then move forward.
The flip side is that markets can rise quickly when clarity returns. We saw an example of that 10 days ago, when the White House announced that certain tariffs would be delayed by 90 days. The S&P 500 rose nearly 10% that day, its best day in more than 15 years. We’re still not out of the woods, though. Until there’s clarity, uncertainty will continue to be a day-to-day drag on markets.
4. The stock market is—ultimately—rational. Benjamin Graham, the father of investment analysis, explained the stock market’s seemingly irrational behavior with an analogy: In the short term, he said, the market is like a voting machine, but in the long term, it’s a weighing machine. Stock prices, in other words, often overreact in the short term, but as things settle down, they tend to more accurately reflect corporate profits, as they should. This idea seems particularly applicable right now.
Even if the new tariff policies put a dent in corporate profits, that damage is likely to be temporary. Over time, companies will find ways to adjust and to grow. That’s another reason it’s best to stay invested, despite the recent stream of bad news. If we believe that corporate profits will be higher five and 10 years from now, then that’s what matters, and that’s what should give us the confidence to look beyond today’s news.
5. Even policymakers don’t know where policy is headed. Last fall, after the election but before the inauguration, the incoming Treasury secretary, Scott Bessent, gave an interview and shared his thoughts on tariffs. Seeking to calm those worried about the potentially inflationary impact of tariffs, he offered some back-of-the-envelope math to illustrate why consumers shouldn’t worry. In his example, he assumed a 10% tariff rate. In reality, the administration is planning tariffs in excess of 100% on some countries, especially China. As investors, it’s helpful to monitor developments, but we should never put too much stock in the opinions even of policymakers.
6. The Fed’s control is more limited than it may seem. The Federal Reserve is a bit of an opaque institution. I’ll never forget the cab driver who spent the entire ride sharing with me his favorite conspiracy theories about the Fed. In simple terms, though, one of the Fed’s key roles is to set short-term interest rates. When the economy is flagging, it lowers rates to encourage economic activity, and when things are running too hot and inflation rises, the Fed lifts rates to cool things down.
But as we’ve seen this year, even the Fed’s ability to control rates is limited. While inflation has been coming down and the Fed has lowered short-term rates in recent months, bond yields have risen over the past few weeks. That’s a result of the uncertainty described above.
Each time the Fed’s Open Market Committee meets, it issues a statement that includes committee members’ expectations for future rate changes. Recent events, though, remind us that even when officials know which way policy is headed, it still may not have the intended result. This year, in fact, the market has gone in precisely the opposite direction.
7. Stock-picking is difficult but may be even more difficult at times like this. A recent MarketWatch article argued that, “It is a good time to be a stock picker right now.” Proponents of active management like to make this argument during periods of market volatility, when it seems easier to separate winners from losers.
But recent events don’t support this argument. Consider the news that authorities in Beijing have opened an investigation into American manufacturing firm DuPont. Its shares dropped 16% in one day. This is hardly an isolated case. Stock prices continue to be knocked around by the news of the day.
Even the most sophisticated investors are having a hard time. As The Wall Street Journal described recently, Wall Street pros have been just as whipsawed by recent events as everyone else. One hedge fund manager described waking up every 15 or 20 minutes during the night to check the news. Some might see this as a stock-picker’s market. To me, it’s a picture-perfect example of why index funds are a better bet.
Adam M. Grossman is the founder of Mayport, a fixed-fee wealth management firm. Sign up for Adam’s Daily Ideas email, follow him on X @AdamMGrossman and check out his earlier articles.
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“Usually, when investors become fearful, they seek out the safe haven of the bond market, and especially the security traditionally offered by U.S. Treasurys.”
the problem is that US Treasuries are no longer a safe haven, as no-one knows what the mad king might do next.
All the old certainties melt into air when the regulatory state is dismantled.
Foreign stocks are booming and are now disconnected from US stocks, which hasn’t happened in decades. As Zeynep Tufekci notes, “decades-long stable *correlations* between stocks, dollar and US bond yields are still breaking. ”
Yes! It’s a lesson in humility. Thanks for the reminder.
If you are a good investor, you can make money no matter what is going on. Exciting times provide more opportunities.
Following the Warren Buffett model, a prudent investor looks for good companies at favorable prices. If you can get these companies at a discount, and hold them for the long term, you will make money.
Yet another example of how futile is to predict what the markets will do next, and why a strategy of holding a diversified portfolio through index funds is not only simpler, but will likely give better results.
According to Buffett and Bogle you never have to look for excuses and lessons. Buy and hold is an easy answer of doing nothing.
Stock-picking and beating the SP500 are extremely difficult, but investment doesn’t have to be all or nothing. Buffett said…”Diversification is protection against ignorance, it makes little sense if you know what you are doing.” But Buffett also said that most investors use the SP500.
I have a good friend who did both. In 1990 he invested $3K in 10 companies; before that and after that, he invested all his money in the SP500. 9 companies didn’t beat the SP500, but MSFT made him more than 1.5 million dollars.
Markets may be rational, but when we have an irrational person doing irrational things, markets cannot be rational. Also, we can believe corporations will be profitable down the road, but with the uncertainty purposely caused by an irrational administration, it could be quite a while.
When I’m not sure what to do… I try not to do anything
Uncertainty, chaos and fear – the terrible triplets.
John Kenneth Galbraith said that economists don’t forecast because they know, but because they are asked.
On October 17, 2008, Warren Buffett published an op-ed piece in the New York Times. He pointed out the financial world was in terrible shape and that things didn’t look very rosy at all. He said he was buying stocks in his personal account. He was only off by six months in calling the bottom.
I’m waiting for Warren to write another article…
Buffett may have given a heads-up last Fall when he sold all of his SPY & VOO holdings.
Good advice Adam.
Years ago, I heard the famous CBS newscaster Eric Sevareid say that African witch doctors were right more often than economists. I believe that is still true. Lol
Harry Truman is said to have wished he could meet a two handed economist. He disliked it when he heard an economist say, “On the one hand……
Your short answer is “I don’t know, and you don’t either”. Some of us just can’t generate the required humility to admit that.
The bond market is speaking loudly. Government debt levels,
Creditworthiness and Geopolitical or fiscal instability are risks to big to ignore. Negotiating with Yosemite Sam is having significant adverse outcomes Brand name damage and new alienating global trade agreements are a few more long term negatives. Foreign investments, Gold, CD and short term Treasuries help me sleep at night. Prefer to just get out of harms way.
Interesting. Several years ago, we had the highest inflation in over 40 years, and millions really suffered. Then in 2022, bonds had the worst year in 50+ years for 10-11 months, but the same group of people who scream murder now never did it in that time.
So far in 2025, the SP500 is down about 10% and VGIT (treasuries) are up 3+%. For March 2025, CPI fell -0.1% and PPI fell -0.4%. Let’s be patient for several more months.
The SP500 made 50% during 2023-24, valuations are very high. Is there a chance that the decline this year has something to do with past performance and valuation?
Agree, 2022 was a nail biter, but the $$ remained strong. The feds attempt to tame inflation kept global confidence intact as COVID repercussion’s were still lingering. Now with $ devaluation, whipsaw tariffs, erratic unchecked governance has eroded confidence. We scorned and insulted our allies that graciously funded our debts for decades. Now we may own it. Time will tell.
Good article, Adam. I get so tired of those pundits saying “now is the time for a stock picker”. Has anyone ever heard these guys say..” now is the time to just buy the index because everything is going up” ?>