Understanding Market Volatility Amid Rising Protectionism and Uncertainty in 2025

The past few weeks in capital markets have been very difficult. In short, U.S. equity markets seemingly have much more to worry about then they did just a month ago. I’m not an economist, nor a historian, but historically protectionist behavior (tariffs) have not been favorable for equity markets. I have no idea how this will end, but when volatility percolates, I find it helpful to think about the big picture.

Maintaining perspective during times of tumult is much easier said than done. Capital markets don’t like uncertainty and headline risk is back with a vengeance in 2025. Generally, volatility is the price of admission in equity markets, and we get regular reminders.

Source: Portfolio Labs

The visual above shows every drawdown for the Nasdaq-100® Index (NDX) in aqua and the S&P 500® Index (SPX) in light brown. The data goes back a decade. Ideally, what becomes clear is that pullbacks of 5%-10% from all-time highs happen frequently. There have been at least ten times over the past decade that the NDX has suffered 10% drawdowns.

This.

Is.

Normal.

This is also not fun.

Nobody knows how this will resolve, and it’s entirely possible that a “correction” turns into a bear market (-20% from highs). Those occur with much less frequency, but it’s inevitable at some point. Perspective.

Speed

What’s particularly off-putting for many investors is the speed at which the market corrects. This visual plots the 10-day realized volatility (RV) for the NDX going back three years. Generally, NDX short-term RV vacillates between 25% on the high end and about 12% on the low end. The recent plunge occurred with significant velocity and pushed the 10-day RV measure up to ~32%.

For those interested in comparison points, so far, this risk-off move is similar in terms of realized volatility and overall decline to the selloff that culminated in early August of last year. In both cases, volatility moved from the low end of the range to 30%+ in less than two weeks. On a close-to-close basis, the NDX declined by 13.5% last summer. On an intraday basis, the selloff reversed at 15.7%.

As of March 13, 2025, the current drawdown is right at 13.3%. The market hit all-time highs on February 19, and in the course of 16 sessions, has moved firmly into correction territory. The speed at which risk is repriced these days is unique.

Glass Half Full

For those inclined to believe that the U.S. (and global) economy will likely muddle through a “period of transition” and avoid a recession, the recent volume swell in the largest NDX--tracking ETF (QQQ) may serve as an arrow in the quiver. ETF and option volumes tend to rise during selloffs. In some situations, activity will peak alongside local bottoms in the product. The visual above shows that trend playing out during the previous three significant drawdowns in the index.

Source: BofA Global Fund Manager Survey

Another potentially contrarian indicator comes in the form of a recent Bank of America survey[EC1] . The data tracks the percent of their fund managers who are “overweight technology.” This information goes back two decades, and the survey has rarely fallen to recent levels. The last occurrence came just before the introduction of ChatGPT, which helped catalyze a meaningful sentiment and positioning reversal.

To be fair, survey (and other “soft” data) can be spurious. Beyond that, the negative sentiment from 2022 was persistent, so perhaps this should be taken with a grain of salt.

The Financial Times covered a handful of related metrics for those inclined to dig deeper. Morningstar takes a more fundamental analysis. Their analysis points to much more reasonable valuations for the Mag 7 given the roughly 20% pullback in the basket. Their angle considers Amazon, Alphabet, Meta and Microsoft to be undervalued. They bucket Nvidia and Tesla as “fairly-valued” and Apple remains “overvalued.”

Glass Half Empty

Honestly, there’s countless reasons to potentially be very concerned about U.S. equity markets. The list gets longer every day, particularly if you’re curating information in a bearish echo chamber on social media. Uncertainty can weigh heavily on the broad market and investor psyche.

Prolonged economic uncertainty can be particularly painful. Markets often move relative to expectations, and perhaps the current pullback hasn’t fully discounted the potential implications of a broader trade war. There’s no modern playbook for “beggar thy neighbor” policies.

Michael Cembalest (JPM Asset Management) should be considered fundamental reading from my perspective. His most recent Eye On the Market started with this incisive take:

“Here’s the interesting thing about the stock market: it cannot be indicted, arrested or deported; it cannot be intimidated, threatened or bullied; it has no gender, ethnicity or religion; it cannot be fired, furloughed or defunded; it cannot be primaried before the next midterm elections; and it cannot be seized, nationalized or invaded. It’s the ultimate voting machine, reflecting prospects for earnings growth, stability, liquidity, inflation, taxation and predictable rule of law.

While market consensus assumed the administration would carefully balance inflationary, anti-growth policies with pro-growth policies, it has come storming out of the gate with more of the former than the latter. The only surprise is that it’s happening before 50 days has passed since the inauguration.”

Opportunity Rich Environment (Index Options)

For those with the stomach for elevated volatility and an inclination to be tactical against that backdrop, there may be an opportunity-rich environment. Index option volumes continue to increase as sophisticated end users look to manage their exposure over discrete time frames.

In the next few days, there will be a quarterly options expiration. While the rise of shorter-dated maturities has, in some ways, diminished the relative importance of the third Friday in March, June, September and December, it remains a critical juncture for many institutional managers.

The recent declines in index values likely pushed dealers and liquidity providers into “short gamma” positions that tend to exacerbate daily volatility. Perhaps when those derivative exposures are monetized, expire or rolled out in time… the market may find some footing.

The technology and consumer discretionary names that have considerable sway on the NDX tend to lead markets in both directions. There are a wide range of alternatives to express your view using Nasdaq-100® Index Options (NDX) or Nasdaq-100® Micro Index Options (XND).