In the Spotlight Trend of the Month
Investors are facing a great economic uncertainty at present. As a result, major stock market indexes such as the S&P 500 and the Nasdaq have experienced sharp pullbacks.
Now, high levels of economic uncertainty — and related market volatility — can be scary, especially if you are heavily invested in equities.
However, it can also present opportunities if you know where to look.
Tariff uncertainty
There are several issues weighing heavily on investors' minds right now. One is tariffs. This is a dynamic, complicated situation that is changing from day to day so it’s hard to navigate. Ultimately, tariff uncertainty is making it nearly impossible to forecast future earnings (and obtain valuations) for many companies. Not only are investors facing a lack of visibility, but businesses are too. In April, many well-known companies — including the likes of Walmart, Starbucks, and Delta Airlines — scrapped their full-year guidance.
Recession fears
Another issue on investors’ minds is a potential economic slowdown or recession. Because of the tariff uncertainty, businesses don’t have the confidence to spend or invest at the moment. As a result, many analysts believe that a recession is likely in the months ahead. Note that the official definition of a recession is two consecutive quarters of negative GDP.
Whenever there is talk of a recession, asset prices tend to fall in advance, which explains why the market has taken a hit recently. Even though companies have not yet seen their revenue or earnings decline, the market's anticipation of a future drop is reflected in share prices.
It should be noted, however, that in a recession, some companies are more vulnerable than others. Often, those with stable cash flows and strong balance sheets show resilience. On the other hand, companies with cyclical revenues and high levels of debt can be impacted quite badly. If these companies don’t have the cash flow to service their debt, they may need to sell assets to comply with debt requirements (this is known as operational deleverage). If a company cannot find a way to service its debt, it may end up defaulting on its loans. This can impact lenders such as banks and potentially result in a systematic economic shock.
It’s worth pointing out that a similar kind of deleveraging process can occur within the financial markets. Institutional investors often borrow money in countries with low interest rates (e.g., Japan) and then invest in markets where the return potential is attractive. If these markets experience sharp drawdowns, margin calls can occur, forcing institutions to close their positions. This financial deleveraging can put more pressure on the prices of the assets. Sometimes, there can be a snowball effect where panic sets in, and asset prices plummet. This can lead to a sharp increase in the CBOE Volatility Index or VIX (aka the “fear index”), which is a popular measure of the stock market's expectation of volatility based on S&P 500 Index options.
Note that in the lead-up to a recession, capital often flows towards defensive assets.
We have seen this in 2025 with gold — which is a classic safe-haven asset. Year-to-date, its price has risen more than 25% as investors have scrambled to protect their portfolios. This has pushed gold mining stocks up as higher gold prices are likely to lead to higher earnings for many producers of the precious metal.
Fixed-income securities or “bonds” can also see strong inflows during periods of economic weakness.
These securities are generally less risky than stocks as they pay regular income and investors have a higher claim on a company's assets than stockholders do in the event of bankruptcy. Often, when equities are falling, bonds experience an increase in prices. So, adding them to a portfolio of stocks can lower overall risk levels significantly.
Other areas of the market that can see inflows during periods of economic weakness are defensive sectors such as utilities and food and drink stocks, and dividend stocks — which offer two potential sources of return for investors.
A loss of confidence in the US
One other issue that investors are grappling with right now is a loss of confidence in the US. Recently, global investors have become frustrated with the unpredictable policies and rhetoric coming out of Washington and they have pulled capital out of the country at an alarming rate. Not only have US equities seen huge outflows, but US Treasuries and the US dollar have too. This is an interesting situation because in past economic crises, the US has generally been viewed as a pillar of safety and US Treasuries and the US dollar have been seen as safe-haven assets.
Against this backdrop, there are several asset classes that are worth highlighting.
One is European equities. This year, they are outperforming US stocks by a wide margin, especially in USD terms (thanks to the weaker US dollar). By taking a globally diversified approach to the stock market and including European stocks as well as stocks from other geographic regions such as Latin America and Far East Asia, investors could have potentially generated more stable returns.
Another asset worth highlighting is Bitcoin.
In recent years, it has often followed the Nasdaq quite closely, however, since “Liberation Day,” it has decoupled from the index. Of course, Bitcoin — which is sometimes viewed as a form of “digital gold” and an asset with safe-haven attributes — was originally designed to operate without the need for a central authority like a government or bank. With confidence in the US financial system eroding, it appears to be benefitting. This, in turn, is benefitting other cryptoassets such as Ethereum and Cardano. So, taking a diversified approach to crypto investing could potentially pay off.
Focus on correlation
When diversifying an investment portfolio, it’s a smart idea to focus on “correlation.” This is a statistical measure that indicates how assets move in relation to each other. When assets move in the same direction at the same time (e.g., two semiconductor stocks), they are considered to be positively correlated. However, if one asset tends to move up when the other moves down (e.g., stocks and bonds), the two assets are considered to be negatively correlated. Combining assets that are negatively correlated can help to lower portfolio risk. If one falls, the other may provide some protection.
Opportunities for investors
In summary, while there are high levels of uncertainty and market volatility right now, there are still plenty of opportunities for investors. By building a globally diversified portfolio that has exposure to many different uncorrelated asset classes, investors can potentially protect themselves from some of the risks that are present today.
