The first half of 2025 saw significant volatility in global markets, driven by US tariff announcements and geopolitical tensions. The sharp downturn and subsequent recovery have been a vivid reminder that financial markets are not just numbers and charts - in the short term they are deeply influenced by human psychology. 2025 also highlighted the importance of preparing ahead of time for the emotional rollercoaster that comes with investing.
The markets’ dramatic journey in the first half of 2025
After starting the year with optimism, global equity markets faced a sharp downturn in April when the announcement of sweeping US tariffs triggered a sudden sell-off. The S&P 500 fell nearly 20% from its February highs, reflecting widespread investor concern about escalating trade tensions and their potential impact on global growth.
However, markets rebounded almost as quickly, after the US administration put a pause on the proposed tariff increases. This pause, combined with signs through June that economic data was not deteriorating as feared, helped restore investor confidence. The market’s resilience was further tested by the military flare-up between Iran and Israel in June – but the market impact was limited as the conflict remained relatively contained.
By mid-year, the S&P 500 and Nasdaq had recovered their losses and even hit new record highs, with the S&P 500 up about 5.5% for the year so far.
In this update, I explore how investor sentiment shaped these market movements, why understanding market psychology matters, and how both fund managers and investors can manage emotions to stay on course.
The emotional drivers behind market volatility
In April, the announcement of proposed tariff hikes on nearly all global trading partners triggered widespread fear among investors. Concerns about rising costs, disrupted supply chains, and the risk of a recession led to a rapid sell-off. The S&P 500’s 20% drop in just a few weeks was a stark example of how uncertainty and fear can amplify market moves.
Fear is a powerful emotion in investing. It can cause investors to make impulsive decisions – selling assets at the worst possible time, locking in losses, and missing subsequent recoveries. Conversely, when positive news emerged in May – such as the pause on tariff increases and progress in trade negotiations – investor sentiment swung to optimism. This hope fuelled a swift rebound, with markets rallying nearly 25% from their lows.
Rapid market moves often reflect the collective sentiment and reactions of short-term investors, rather than purely rational analysis.
How fund managers navigate emotionally-driven market swings
As fund managers, our role is to navigate these uncertain tides with discipline and a focus on fundamentals. Here’s how we approach it:
Revisit company fundamentals: We regularly review the financial health, competitive position, and growth prospects of the companies we invest in. This includes stress-testing their resilience against current market concerns, such as tariffs or inflation.
Focus on long-term outlook: If the long-term fundamentals remain strong and unchanged, short-term volatility is often just noise. This conviction helps us avoid knee-jerk reactions and stay invested.
Diversification and risk management: By spreading investments across sectors and geographies, we reduce the impact of any single event or market sentiment shift.
Continuous monitoring: We keep a close eye on the companies we follow, industry developments, policy developments, and economic data – and we adjust our portfolios as the investment fundamentals change.
This systematic and disciplined approach allows us to manage portfolios thoughtfully, rather than emotionally, aiming to grow your investments over the long term.
What investors can do: Managing your mindset
Investors can adopt similar principles to manage their mindset and investment decisions:
Have a financial plan: A clear plan aligned with your goals, timeframe, and risk tolerance provides a roadmap to guide your decisions during volatility.
Review your plan with an adviser: In turbulent times, it’s wise to revisit your financial plan with your adviser. This review can help confirm whether your goals or risk tolerance have changed.
Stay the course if fundamentals are unchanged: If your objectives and risk profile remain the same, short-term market swings should not prompt drastic changes. Staying invested helps capture recoveries and long-term growth.
Avoid impulsive reactions: Selling in panic or chasing returns during rallies often leads to poorer outcomes. Discipline and patience are key.
As the famed investor Benjamin Graham advised: “The investor’s chief problem – and even his worst enemy – is likely to be himself.” Recognising this is the first step to overcoming emotional pitfalls. The first half of 2025 has shown that markets can swing dramatically in response to headlines and sentiment but underlying economic resilience and corporate fundamentals often prevail. Staying disciplined and understanding the emotional forces at play during market volatility can help investors navigate the uncertainty with more confidence.
Talk to us
If you have any questions about your investment or would like to make sure you have the right investment strategy to reach your ambitions, get in touch with us – our team are always happy to help.
