This Isn’t New: Understanding the Market Correction
Quick Take
Markets pulled back in the first quarter, with the S&P 500 entering correction territory due to trade uncertainty, weakening consumer and business confidence, and disruption in the tech sector.
Bonds provided stability, and international markets showed signs of strength, highlighting the value of diversification.
While volatility is uncomfortable, it’s a normal part of investing—and staying focused on long-term goals remains the best approach.
After a strong start to the year, markets took a step back in February and March. Global stocks returned -1.3% for the quarter, while the S&P 500—led by a pullback in tech—fell 4.3%. From its recent peak, the S&P 500 declined over 10%, entering correction territory.
We know this kind of market movement can be uncomfortable. Seeing headlines about corrections or watching account balances dip can naturally cause concern. But as we’ve seen many times before, these periods are a normal part of investing.
Here’s what we believe is behind the recent pullback:
1. Trade tensions are in focus. New tariffs were announced in the first quarter and recently on April 2nd (“Liberation Day”). The back-and-forth nature of trade policy has added uncertainty. The “Liberation Day” day announcement proved to me worse-than-expected with steep and broad tariffs that have roiled financial markets.
2. Confidence data has softened. Consumers and business leaders are showing more caution. Consumer sentiment—an important driver of the U.S. economy—has dipped, partly due to concerns about rising prices. Business confidence has also fallen, with the CEO Confidence Index seeing a sharp decline.
3. A shift in the tech narrative. Chinese AI firm DeepSeek revealed its R1 model could match the performance of leading AI systems using far less computing power. This sparked questions about the future payoff of large investments in chips and data centers, causing some unease in tech markets. Recent stock market gains have been driven largely by the technology sector and expectations of continued investment.
Bonds Are Offering Stability
Amid the volatility in stocks, bonds did their job. The Bloomberg U.S. Aggregate Bond Index rose 2.8% in Q1. Bonds in general benefitted from higher starting yields, offering more yield income. Falling interest rates have also added to bond performance this year. Treasuries, TIPS, and mortgage-backed bonds all contributed to strong returns, highlighting the value of balance in a diversified portfolio. Tax-exempt municipal bonds were the notable laggard weighed by tax policy uncertainty, federal funding cuts in some sectors.
The financial market response to tariff announcements have been negative. As is typical during market turmoil, US Treasury bonds have benefitted from safe-have flows and expectations of slower growth. Other traditional hedges – gold and the US Dollar, are not seeing the same support.
A Rotation into International Markets
While U.S. stocks saw the biggest declines, other parts of the world found firmer footing. European defense stocks rallied as expectations grew for increased regional spending. In China, ongoing government support and improving earnings lifted markets. This shift is a reminder that opportunities can emerge even when U.S. markets pull back. Could the rest of the world continue to trade with more favorable terms without the U.S.? It is possible the world is being reshaped in a way the US is less important.
Corrections Are Normal—Even if They Don’t Feel That Way
It’s never easy to watch markets fall, but pullbacks like this are not unusual. Since World War II, the average market correction has been about 14%. Despite that, markets have historically recovered—often when it’s least expected. We’ve seen it happen after the COVID-19 crash, the 2022 tech-led downturn, and many other times before.
There’s almost always something worrisome making headlines. Uncertainty is a constant in investing. What matters most is having a plan and sticking to it—especially when things feel uncertain.
What We're Doing, and What You Can Do
We continue to lean on key principles to help clients stay steady and focused:
Diversification matters. Owning a wide mix of investments—across sectors, regions, and asset classes—helps reduce risk and smooth out returns over time. Some of last year’s underperformers are this year’s leaders.
Avoid reactive decisions. It’s tempting to want to “do something” when markets fall. But history shows that emotional decisions often hurt long-term results. Staying patient and focused on your long-term goals is often the best move.
In portfolios, we’ve made a few important shifts this year:
Rebalanced stock exposure in accounts where positions had grown meaningfully above targets.
Reduced holdings in corporate bonds, where we felt the reward didn’t justify the risk.
Trimmed positions in companies, we believe, are more exposed to trade volatility. We have also added companies we believe have strong long-term prospects at more attractive entry points.
What It All Means
We don’t expect all the uncertainty to clear up overnight. But we do expect the markets and the economy to adjust over time. No one can predict exactly how things will unfold—but what we can do is ensure your financial situation and portfolio are designed to weather periods like this.
As always, we’re here to support you—whether you have questions, want to revisit your plan, or just need a second opinion during uncertain times. Staying invested and staying grounded in your goals is the best way to get through the noise.
Contact us at 865-584-1850 or info@proffittgoodson.com
