Why markets just got so volatile - and what it means for investors

This latest surge has been driven by a mix of factors:

• Renewed tensions between the U.S. and China, including steep new tariffs and retaliatory measures
• Fears of a broader global economic slowdown if the trade conflict deepens
• Heavy selling in both tech stocks and broad equity indices
• A sharp rise in short-term trading activity that may have amplified intraday moves

What makes this episode different?

Volatility is not unusual—but a few features of the current environment stand out.

First, the market reaction appears to have caught many off guard. Several measures of positioning suggest that investors were not heavily hedged going into the week. When China’s tariff retaliation hit headlines, it triggered a rush to reduce risk, which may have exaggerated the sell-off.

Second, we’ve seen an unusually high level of correlation across assets. In the Nasdaq 100, for instance, 99 out of 100 stocks were down in a single session. This kind of synchronized selling is relatively rare, and it’s often seen during moments of high emotional stress in markets.

Another unique aspect of this moment is the number of overlapping risk factors. The market is not only reacting to trade tensions between the U.S. and China, but also to domestic policy signals. For instance, recent public statements from former President Donald Trump have criticized Federal Reserve Chair Jerome Powell for not cutting interest rates faster, highlighting tensions between political and monetary priorities. While the Fed is an independent institution, uncertainty about how monetary policy will evolve—especially under political pressure—can influence investor confidence.

What could happen next? A look at possible scenarios

It’s impossible to predict what happens next in the markets. But investors can think through a few general scenarios that might shape how volatility plays out in the coming weeks:

1. Volatility subsides quickly

In this scenario, markets digest the shock, macro data remains stable, and investor sentiment gradually improves. Volatility drifts lower, and price stability returns. Historically, some volatility spikes have been short-lived—especially when no systemic financial risk is involved.

2. Volatility stays elevated

This is often what causes the most discomfort for long-term investors. Volatility doesn’t always resolve quickly. It can stay elevated for weeks or months if uncertainty lingers, especially around policy decisions, earnings, or geopolitical tensions. This was the case during parts of 2011, 2015, and mid-2022.

3. A deeper market drawdown develops

If sentiment continues to deteriorate, and earnings or economic data weakens, a deeper correction or even a bear market becomes possible. This isn't a forecast—but it's a scenario that investors have seen before in past cycles, such as during 2008 or early 2020.

It’s also possible that we see a mix of these paths: an initial rebound followed by more volatility, or periods of calm followed by renewed selling.

Additional unknowns may also influence how markets behave. So far, the European Union has not issued a response to the recent escalation in tariffs between the U.S. and China. Any future retaliation—whether from Europe or other major economies—could increase uncertainty and weigh on global growth expectations. Trade policy is often unpredictable, and markets tend to react quickly to headlines, especially when risk appetite is already low.

Similarly, ongoing tension between fiscal and monetary leadership in the U.S.—such as differing views between policymakers and the Federal Reserve—could add to short-term volatility. Even if those tensions don’t result in immediate policy changes, they may affect how investors interpret future interest rate moves or inflation expectations.

Why long-term investors should stay grounded

It’s natural to feel concerned during sharp market declines. But volatility itself isn’t new—it’s part of the market’s long-term rhythm. What often matters most is how investors respond to it.

Historically, markets have experienced many episodes of high volatility and large drawdowns, only to recover over time. Staying diversified, avoiding emotional decision-making, and maintaining perspective has often helped investors stay on track through turbulent periods.

That said, these periods can also be a time to revisit investment plans, understand what’s in a portfolio, and evaluate whether current risk exposure still aligns with long-term goals.

Final thought