The stock market’s recent gyrations have tested the mettle of even the most stoic investors. In early April, President Donald Trump’s “Liberation Day” tariff announcement — a 10% baseline levy on all American imports, with reciprocal tariffs as high as 49% on various individual countries — sent global markets into a tailspin.
Fears of a trade war, coupled with the increased risk of a US/global recession, saw global equities (as proxied by the MSCI All-Country World Index ETF) fall nearly 12% during the days following the announcement on Wednesday 2 April. (1) However, the news of a subsequent 90-day pause on most reciprocal tariffs (except those imposed on China), along with a scaling back of certain sector-specific tariffs and progress on bi-lateral trade deals, has seen markets stage an impressive recovery.
Most recently, the deal announced on Tuesday 13 May – which temporarily reduced US tariffs on Chinese goods from 145% to 30% and Chinese tariffs on US goods from 125% to 10% for 90 days, while establishing a mechanism for ongoing trade negotiations – propelled global equities above levels prevailing prior to April’s ‘Liberation Day’. At the time of writing, the MSCI ACWI Index ETF is around 6% above the level it was at on Tuesday 1 April. (2)
The experience of recent weeks has reinforced some timeless principles of investing while also providing fresh insights into today's market environment.
Volatility: the price you pay for higher returns
The events of April 2025 provide a reminder that volatility is an inescapable reality for equity investors. Such fluctuations, while unnerving, are a fundamental feature of stock markets and are the cost investors must accept to access the superior long-term returns that equities have historically delivered compared to bonds and cash.
The best-selling financial writer Morgan Housel perhaps put it best: "Volatility is the price of admission. The prize inside is superior long-term returns. You have to pay the price to get the returns."
Recent market moves also chime with the observation that, while global equity markets often see large falls, most declines are followed by a recovery within a year. According to Goldman Sachs, despite median intra-year drops of 15%, the annual returns of the MSCI ACWI index were positive in 34 of the past 45 years. (3)
This is not to deny that intra-year drops are painful. Furthermore, angst regarding the performance of one’s investment portfolio can be accentuated by the tendency for large stock market plunges to make the news headlines, while the steady daily gains which produce long-term returns rarely garner much mainstream media attention. This asymmetry can distort perceptions, leading investors to overestimate risks and undervalue the compounding power of consistent growth.
For long-term investors, the lesson is to tune out the media’s alarmist bias and focus on the market’s underlying trajectory, which generally rewards patience over panic.
Missing the best stock market days is costly
The recent market volatility has also illustrated how some of the stock market’s best days have a tendency to occur around times when markets have fallen sharply. By way of example, having fallen by 12% during the days following “Liberation Day”, the main US equity index of the country’s 500 largest companies jumped 9.5% on Wednesday 9 April, when President Trump announced the 90-day pause on ‘reciprocal’ tariffs. (4)
According to Bloomberg, this was the biggest one-day rise since 2008. (5)
The clustering of best and worst days mirrors the historical experience. JP Morgan note that during the period 2005 to 2024, seven of the best days for the US equity market occurred within two weeks of the 10 worst days, with six of the seven best days occurring directly after the worst days. (6)
This phenomenon highlights the risk of panicking and selling down positions after markets have fallen sharply. Missing the market’s best up days (which often occur after big market drops) can seriously dent portfolio performance. An illustration by JP Morgan (aimed at US investors, but relevant for those in the UK) shows that between 2005 and 2024 a US$10,000 investment in US equities would have grown to US$71,750 if fully invested, but would have risen to just US$32,871 if the best 10 up days had been missed. Missing the best 20 days cut returns further still, to just US$19,724. (7)
Of course, in an ideal world, missing the market’s worst days would also lead to a marked improvement in performance. However, to do so while still capturing the market’s best up days, would require perfect foresight. In the absence of such super-human abilities, the popular refrain of financial advisers holds good: time in the market beats timing the market.
The ‘Trump Put’ is alive and well
A key takeaway from the specific experience of recent weeks is that President Trump does tend to back away from market-damaging policies when the fallout becomes too great. This suggests that the notion of the “Trump Put” – the idea that the president will eventually pivot to market-friendly rhetoric or action when markets experience large falls – is still alive.
There is speculation that it was the sell-off in the market for US Treasury bonds (see our commentary of April 2025) rather than the decline in equity markets per se which ultimately triggered Trump’s decision to pause reciprocal tariffs on Wednesday 9 April. (8) Either way, the news ushered in a relief rally in both fixed income and equity markets alike.
It is not surprising that financial market turmoil would force a policy rethink on the part of the President. Trump has long seen the stock market as a proxy for his personal success in managing the economy. In addition, falling bond and equity markets serve to tighten financial conditions, which in turn is likely to cause economic growth to slow.
Moreover, with household exposure to equities at record highs, a market downturn would risk damaging consumer confidence and undermining support for the Republican Party ahead of the 2026 mid-term elections.
More turbulence likely
Of course, this does not preclude further policy-induced turbulence in US and international markets. Trump’s erratic policy announcements and related uncertainty still carry the potential to unnerve investors, and there are growing concerns about the trajectory of US public debt.
Levies on US imports could rise again once the 90-day pause on reciprocal tariffs expires and the US-China truce comes to an end. However, it is a fair assumption that ‘peak tariff’ is now behind us.
Regarding trade tensions, the chatter in markets is now of the TACO trade: “Trump Always Chickens Out”. Furthermore, as the year progresses, the news flow out of Washington could shift away from tariffs and towards more market-friendly policies, including tax cuts and deregulation.
This said, investors would be well-advised to filter out the political ‘noise’ and focus on the fundamentals which, for now at least, have generally remained supportive. Profits growth for the 500 largest listed US companies came in stronger-than-expected in the first quarter, rising 13.6% year-on-year, beating consensus expectations of 7.1%.(9)
In turn, rising profits have enabled US companies to announce record levels of share buyback (10), which, along with reports of heavy buying from US retail investors (11), have supported the market.
An economic downturn clearly poses a threat to markets. However, the scaling back of tariffs has reduced the probability of a self-inflicted recession.
What’s more, although the US Federal Reserve is currently in no hurry to ease policy and will be wary of the potential inflationary consequences of the tariffs that do remain in place, policymakers are likely to respond to any marked rise in unemployment by cutting interest rates. In turn, looser monetary policy would pave the way for the next phase of market recovery.
Riding out the storm
The sell-off sparked by April’s tariff shock and the sharp rebound that followed serve as a powerful reminder that volatility can cut two ways. For investors, the key lesson is to recognise that volatility is the price that must be paid to secure long-term returns, and to recognise that staying invested through periods of turbulence is often what positions a portfolio to benefit most from the subsequent recovery.
In an environment of headline-driven swings and shifting policy signals, resilience, patience, and perspective remain as valuable as ever.
19 May 2025