Navigating sharp market swings
During turbulent times, how you’ve prepared clients and what you do next is of utmost importance.
What's happening
Lower U.S. growth, higher inflation—are we dancing with recession?
Commentary by Joe Davis, Global Chief Economist and Head of Investment Strategy Group
By our calculations, and with the potential for further tariff announcements, the average effective U.S. tariff rate could rise above 25%, well above the baseline we had anticipated at the start of the year. The global marketplace was far less integrated the last time tariffs were that high, more than a century ago. Although we don’t expect the rate to remain at that level given the prospect of negotiations, one that settles just below 20% (our baseline) still augurs significant economic ramifications. The effective U.S. rate before the latest tariffs was below 5%.
Under our revised baseline scenario, 2025 U.S. GDP growth would fall below 1%, nearly a percentage point below our previous forecast. That would put the economy at a potential “stall speed” that raises the specter of recession. We also foresee core inflation ending 2025 at nearly 4% year over year, more than a percentage point above our previous forecast. Unemployment that we foresee rising to just above 5% by year-end would be the highest in a decade outside the COVID-19 era.
The combination of stagnating activity and rising prices introduces the prospect of stagflation that would be a strong headwind for both stocks and bonds. Given their dual mandate, the Federal Reserve may be challenged to lower rates meaningfully amidst a push and pull of lower growth and higher inflation. In the end, the Federal Reserve is likely to lower rates in the event of the labor market weakening further.
Outside the U.S., we anticipate weakening economic growth, although softening demand will likely temper any inflationary impulses.
Our fortitude will be tested
A pullback from growth, higher prices, and an increased downside risk may be on the horizon from the newly imposed tariffs. Could some countries dip into recession? How long could it all last? Listen to insights from Vanguard’s global chief economist, Joe Davis.
What steps to take
3 steps to help clients endure market volatility
Market volatility is nothing new. How you’ve prepared clients and what you do next are of paramount importance. Now is the time to lean into discipline and help guide your clients to continued investing success.
Use the Market Hindsight Tool
Give your clients a simulated snapshot of historical market events and the potential impact on their portfolios. This realistic glimpse demonstrates the true value of staying invested, especially during turbulent financial markets.
More insights
Expert Perspective
Our chief economist weighs in on the chance for recession in the United States and around the world in the wake of significant market movement.
Vanguard Perspective
Although the U.S. tariff announcement on April 2 adds some clarity to the administration’s tariff stance, the situation remains fluid.
Expert Perspective
Putting recent market volatility into historical context can help clients tune out the noise and focus on the long term. This article emphasizes the enduring value financial advisors provide clients as they guide them through market uncertainty.
Expert Perspective
Senior International Economist Kevin Khang, Ph.D., offers perspective on the nature of the recent spike in market volatility.
Disclosures and footnotes
Bond funds are subject to interest rate risk, which is the chance bond prices overall will decline because of rising interest rates, and credit risk, which is the chance a bond issuer will fail to pay interest and principal in a timely manner or that negative perceptions of the issuer's ability to make such payments will cause the price of that bond to decline.
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The information contained herein does not constitute tax advice and cannot be used by any person to avoid tax penalties that may be imposed under the Internal Revenue Code. Each person should consult an independent tax advisor about their individual situation before investing in any security.
Tax-loss harvesting involves certain risks, including, among others, the risk that the new investment could have higher costs than the original investment and could introduce portfolio tracking error into your accounts. There may also be unintended tax implications. Prospective investors should consult with their tax or legal advisor prior to engaging in any tax-loss harvesting strategy. Neither Vanguard Personalized Indexing Management nor Vanguard provide tax or legal advice.
All investing is subject to risk, including possible loss of principal. Be aware that fluctuations in the financial markets a nd other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Prices of mid- and small-cap stocks often fluctuate more than those of large-company stocks. Investments in stocks or bonds issued by non-U.S. companies are subject to risks including country/regional risk and currency risk. These risks are especially high in emerging markets. Funds that concentrate on a relatively narrow market sector face the risk of higher share-price volatility. It is possible that tax-managed funds will not meet their objective of being tax-efficient.