Navigating market volatility: March 2025 market update

Making sense of market volatility: What investors need to know.

After a strong start to 2025, financial markets have hit a period of increased volatility. Investors kicked off the new year confidently—expecting steady growth, cooling inflation, and potential interest rate cuts. However, recent developments—including Trump’s aggressive trade policies, economic uncertainty in China, and shifting expectations around US Federal Reserve policy—have created a more challenging environment and increased market volatility.

So, what’s really going on, and what does it mean for investors? Martin Kofoed, Investment Consultant with Zenith Investment Partners and Kearney Group’s Ethos Investment Committee is here to unpack it in our March 2025 Market Update.

The Trump trade effect: tariffs take centre stage

Markets initially cheered Trump’s re-election, expecting pro-business policies to fuel economic growth. But the optimism has since been overshadowed by the reality of his hardline trade stance. New tariffs—applied faster and more broadly than expected—have introduced fresh uncertainty into the global economy.

Tariffs act as a tax on both businesses and consumers, raising costs and disrupting supply chains. The latest round has driven up prices on imported goods, dented business confidence, and pressured US manufacturers. The ISM Manufacturing Index, a key gauge of industrial activity, has slipped into contraction territory, reflecting a slowdown in new orders. Meanwhile, consumer confidence has started to wobble amid inflation concerns and weaker job growth.

The impact isn’t confined to the US. Australian markets have felt the ripple effects, with the ASX 200 falling 7.5% in recent weeks as commodity prices retreat. China, Australia’s largest trading partner, is struggling to hit its 5% growth target, with weak exports and ongoing property market woes raising concerns about broader economic stability.

Bonds flash a warning signal

The bond market is often a good indicator of investor sentiment, and right now, it’s signalling caution. US 10-year Treasury yields, having previously climbed to 4.7%, have declined precipitously to 4.3%. This reflects growing concerns about stalling growth and uncertainty over Federal Reserve policy.

At the start of 2025, markets had priced in multiple interest rate cuts. But the Fed has taken a more measured approach, with Chair Jerome Powell emphasising the need for clarity before making any moves. For now, investors should expect a ‘higher-for-longer’ interest rate environment, which could put continued pressure on risk assets.

What’s next for markets?

Given these developments, how should investors think about the road ahead?

We regularly update our outlook to reflect shifting economic conditions. Our latest assessment indicates the US economy can still avoid a deep downturn, especially if policy adjustments are made to stabilise sentiment. While the probability of a recession in the US has increased from 20% to 30%, there is a 45% likelihood of a ‘soft landing’ — a scenario where growth slows but remains positive. 

Portfolio positioning: staying invested with a balanced approach

With uncertainty running high, the key question for investors is whether to de-risk or stay the course. Our view is that maintaining a well-diversified portfolio remains the best approach. Rather than retreating to cash, we see opportunities to take advantage of market volatility.

Here’s how we’re positioned

• Equities: We remain neutral on the US but see opportunities in Europe, where lower valuations, European Central Bank (ECB) rate cuts provide tailwinds. Emerging markets (EM) remain a more challenging space due to geopolitical risks, and we hold a slight underweight position.
• Fixed income: With bond yields rising, we favour high-quality corporate debt over government bonds. Credit markets still offer attractive opportunities, particularly in investment-grade debt.
• Alternatives: In an environment of heightened volatility, managed futures and other liquid alternatives can provide downside protection. These strategies can capitalise on market trends—both long and short—making them valuable diversifiers.
• Sector focus: The tech sector remains a key driver of long-term growth, despite short-term pressures. Meanwhile, mining and banking stock have already experienced strong runs and may be vulnerable to shifts in sentiment.

Key risks and what would change our view

While we remain constructive, we are closely monitoring several key risks that could lead to a more defensive stance:

1. Sharp decline in consumer spending: If higher prices and economic uncertainty cause a pullback in consumer activity, it could indicate deeper economic weakness.
2. Prolonged trade war: If tariffs escalate beyond current levels and significantly dampen global trade, it could increase the likelihood of stagflation—slower growth with persistent inflation.
3. Tighter financial conditions: If interest rates remain high for too long, borrowing costs could further slow business investment and job creation.

Final thoughts: staying the course amid uncertainty

Despite the recent market turbulence, we continue to see opportunities for long-term investors. The economic backdrop has become more complex, but history shows that markets can rebound from periods of uncertainty. Staying invested, focusing on high-quality assets, and maintaining a diversified approach remains the best strategy.

Investors should be prepared for continued volatility in the months ahead. But with careful positioning and a focus on fundamentals, there are still ways to navigate this environment and take advantage of market dislocations as they arise.