Understanding Market Volatility in 2025: What Investors Should Know

Market volatility has been front and center for investors in 2025. With sharp swings in prices and ongoing uncertainty, many people are left wondering what’s driving these changes and how to respond. Here’s a clear, up-to-date look at what’s happening in the markets, why it’s happening, and what you can do as an investor.

What Is Market Volatility?

Market volatility refers to how much and how quickly investment prices move up and down. When prices change a lot quickly, that’s high volatility. While it can feel unsettling, volatility is a normal part of investing and is often triggered by economic news, political events, or changes in investor sentiment.

Key Drivers of Market Volatility in 2025

1. Tariffs and Trade Policies

The U.S. government has introduced new tariffs, including proposed 200% tariffs on European alcohol, increased tariffs on steel and aluminum, and potential reciprocal tariffs on all trading partners. These moves have created uncertainty about future economic growth and inflation, leading to significant market swings since the start of the year.

2. Persistent Inflation

Although inflation has cooled from its highest levels, it’s still above the Federal Reserve’s 2% goal. As of February 2025, core inflation was 3.1%, and consumer expectations for inflation have risen to 6%. The Fed doesn’t expect inflation to hit its target until 2026 or later, keeping investors on edge.

3. Interest Rate Environment

The Federal Reserve’s main interest rate is currently 4.25%-4.50%. After rate cuts late last year, the Fed has paused further changes so far in 2025, but two more small cuts are still possible later this year. The Fed is also reducing its monthly Treasury redemptions, which can affect how much money is available in the financial system.

4. Shifting Market Trends

Investors are shifting money from fast-growing technology companies to more stable sectors like financials and communication services. Meanwhile, consumer discretionary companies selling non-essential goods have struggled as people become more cautious with their spending.

5. Changing Consumer Behavior

Rising household debt, higher delinquency rates on loans, and a drop in luxury sales show consumers are feeling the pinch. These trends can slow economic growth and add to market uncertainty.

6. Global Events

Ongoing conflicts (such as Russia-Ukraine), tensions in the Middle East, supply chain disruptions, and changes in immigration policies are all adding to the market’s unpredictability.

Year-to-Date (YTD) Performance of Major ETFs

Here’s how some of the most widely held ETFs have performed so far in 2025:

What’s Next for the Markets?

While no one can predict the future with certainty, several trends are worth watching:

• Economic Growth: The Fed expects slower growth this year, with GDP forecasted to rise just 1.7%            
• Employment: Unemployment is expected to rise above 4.5% by the third quarter as businesses adjust to new conditions                    
• Inflation: If inflation remains high, the Fed may delay planned rate cuts, which could keep markets bumpy
• Policy Changes: Any new announcements on tariffs or trade agreements could quickly move markets up or down
• Sector Rotation: The shift from growth to value stocks may continue as investors look for more stable returns

How Should Everyday Investors Respond?

Stay Focused on the Long-Term:

Trying to time the market rarely works. Keeping your eyes on your long-term goals is usually the best approach.

Diversify Your Portfolio:

Spreading your investments across different types of assets (like stocks, bonds, and international funds) can help manage risk. As seen above, while U.S. stocks have struggled, international funds like IEUR and EWJ have performed better so far this year.   However, many factors, including the decline in the strength of the U.S. dollar, have boosted international investment returns.

Review Your Risk Tolerance:

If recent volatility has made you nervous, reviewing your investment mix with a professional might be time.

Keep Investing Regularly:

Regular contributions, even during downturns, can help smooth out the ups and downs over time (a strategy known as dollar-cost averaging).

Avoid Emotional Decisions:

Selling in a panic often leads to locking in losses. Remember, markets have always recovered from downturns in the past.

Conclusion: Get the Guidance You Need

Policy changes, inflation concerns, shifting consumer habits, and global events are driving market volatility in 2025. While these swings can be unsettling, having a strategy, and taking a calm, informed approach is best.

Don’t try to navigate these uncertain times alone. Contact Financial Life Planning today for a complimentary portfolio review and let our experienced team help you make smart, confident investment decisions. Professional guidance can make all the difference when markets are unpredictable. Click our “Contact Us” button now to schedule your free consultation and take the next step toward financial peace of mind

Edward C. Goldstein, CFP®, MBA, President
CERTIFIED FINANCIAL PLANNER ™ Practitioner 
Financial Life Planning, LLC
10,000 Lincoln Dr. East, Suite 201
Marlton, NJ  08053
Phone: 856-988-5480
Fax: 908-292-1040