As we look back at the first half of 2025, one thing is clear: volatility returned to markets in a big way—and diversification once again proved its worth.

At the heart of this review is the rapid shift in investor sentiment caused by policy changes, geopolitical tensions, and weakening economic data. Despite sharp swings, long-term investors who maintained a diversified strategy were rewarded with renewed gains by the end of the quarter.

Let’s take a closer look at what drove market turbulence—and recovery—this quarter.

Volatility Returns After Strong Start

Markets began 2025 on a high note, building on momentum from the Q4 “Trump rally.” But the tone shifted quickly. The week of February 21st, investor confidence began to erode amid disappointing economic data and early concerns about tariffs.

That shift escalated on April 2nd, when President Trump declared “Liberation Day” and introduced sweeping new tariffs, including a 10% baseline tariff on all imports, with some even higher. Over the next five trading days, the index fell over 11%.

Policy Reversal Sparks Rebound

Just a week later, on April 9th, the announcement of a 90-day pause on reciprocal tariffs prompted a sharp market reversal. The S&P 500 surged 9.5%, and optimism returned, driven by progress on trade talks and expectations for interest rate cuts later this year.

Fixed Income Benefits from Risk Aversion

While equity markets whipsawed, bonds benefited. As seen in the Bloomberg Aggregate Bond Index, investor demand for fixed income increased amid geopolitical tensions and softening economic data. Bond prices climbed as investors sought safety and began pricing in potential Federal Reserve rate cuts.

Volatility Underscores Importance of Diversification

The swift reversals in Q2 2025 reinforce the importance of a long-term, diversified investment strategy. While uncertainty can lead to temporary drawdowns, balanced portfolios that include fixed income, equities, and global exposure tend to weather such storms and recover with resilience.

Stay tuned for more insights from the Investment Research Team in the months ahead.

Sources
S&P Dow Jones Indices, YCharts. Data as of 6/30/2025
Bloomberg, YCharts. Data as of 6/30/2025