Flying Monkeys: The Market’s Sudden Fear

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The general consensus among clients and friends—even those who support the president—is that this was avoidable.

Part of the Wizard of Oz-like fear isn’t just the intensity of the reaction but the unprecedented nature of what we’re witnessing.

The closest historical comparison? The Smoot-Hawley Tariff Act of the 1930s, which worsened an already slowing economy and helped push the country deeper into the Great Depression. The key difference? Smoot-Hawley was a reaction to the crisis—an attempt to shield U.S. manufacturing during a dire economic period.

Today, however, the U.S. economy is thriving—envied worldwide—yet tariffs are being enacted regardless. That’s what makes this moment feel unsettling. Markets had been pricing in mild uncertainty, but within 48 hours, the narrative shifted to something more severe.

When Textbooks Collide with Government Actions

I started the CFA 25 years ago and quickly learned that investment principles teach us to base decisions on economic fundamentals.

But what happens when policy-making and tweets dictate market movements instead? The ability to time downturns is impossible—and government-induced declines are even harder to predict. This makes risk management around your goals and cash flow critical.

Is US Hyper-Exceptionalism Over?

For decades, the world had three major competing investment hubs:

• China
• Europe
• The U.S.

The winner? Overwhelmingly, the United States—leading to a flood of global capital, sky-high valuations, and a concentration where the top 10 companies accounted for 40% of the S&P 500.

At its peak, Nvidia’s market cap was larger than that of only 5-6 other countries.

But recent events may have tarnished the American brand. CEOs now hesitate, capital starts drifting elsewhere, and questions loom about whether the halo effect is fading. Perhaps hyper-exceptionalism is becoming just exceptionalism—which still isn’t bad, but reminds us why global diversification matters.

Markets Have Rebounded (For Now)

The market clawed back within 10% of its highs, a far cry from the 18%-20% drops of Liberation Day.

A natural 5%-10% correction is normal and healthy. But should tariffs escalate or Powell replacement chatter intensify, we could revisit the old lows. Clarity from the administration will be key to avoiding a deep recession.

Recession Odds Have Spiked

Before tariffs? Well under 10%. Today? CEOs and economists estimate a 40%-60% probability.

Is There Any Good News?

It’s difficult to argue otherwise. The 2009 crash was new. COVID was unprecedented.

Even if we’re headed for an artificial downturn, investors with a long-term outlook may find opportunity.

• If you have stable income, a lower-priced entry point can be welcomed.
• Emergency funds, disability insurance, and lower-risk assets help position investors to navigate uncertainty rather than fear it.

Between 1950 and 2024, the S&P 500 saw 11 major bear markets. The average decline? 33%. But bull markets gained an average of 265%.

Missing out on the recovery outweighs the temporary pain.

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Bonds Are Back (With a Catch)

Bonds have resumed their role as diversifiers, but beware:

• Debt levels, inflation risks, and tariffs have injected volatility into longer-duration bonds.
• The 10-year Treasury is selling off—some of it possibly due to foreign investors pulling out in frustration.

For retirees, U.S. Treasuries remain essential, but shorter-duration bonds may help ease volatility.

Roth Conversions: A Timely Strategy?

Now could be an ideal moment to review a Roth conversion.

Why? Because lower asset prices mean lower taxable amounts on the shares being converted. Rather than thinking in dollar terms, consider it in share amounts—where converting at a market dip can lead to significant tax savings.

Example:

• 100 shares of SPY in March 2007 = $14,000 taxable conversion
• Same 100 shares in March 2009 (market bottom) = $9,000 taxable conversion

Even assuming a 20% tax rate, converting at the lower value would save $1,000 in taxes—over 35%!

Beyond tax benefits, Roth IRAs dodge required minimum distributions (RMDs)—offering long-term flexibility.

If tax rates climb to the historic highs of 70%-90%, paying today’s lower rates might be the smarter play—especially for heirs navigating post-Secure Act taxation.

Sona Clients: Use the link at the bottom to schedule your Roth Review.

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If you don’t have a plan and would like to get one, schedule a Discovery Meeting:

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To health and wealth!

Mark Struthers, CFA, CFP®, CRC®, RMA®

For current clients looking for a meeting:

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