March Madness: Navigating volatility

The annual NCAA “March Madness” basketball tournament often stokes excitement with its big upsets and cherished Cinderella stories. This year, the phrase “March madness” also aptly describes what investors faced as markets have continued to grapple with ongoing tariff uncertainty, weakening consumer sentiment and geopolitical tensions. Below, we recap three features that defined March for investors: U.S. equity market volatility, European equity outperformance and the benefits of asset class diversification.

A dip in morale

March headlines were dominated by market volatility, with the VIX index (a.k.a. the “fear gauge”) spiking to nearly 30 – the highest since last August. This reflects heightened uncertainty, partly driven by weakening soft data, which are survey-based measures that gauge future economic conditions. The Conference Board’s latest survey reported a 7.2-point drop in consumer confidence to 92.9, which is the lowest it’s dipped since January 2021. This decline reflects concerns over tariffs, inflation pressures and general economic uncertainty that are weighing on the minds of consumers. The hard data, however – think indicators of dynamics playing out in the real economy, like employment figures and retail sales – remains strong, suggesting that the economy is still on solid footing for now.

The key question for investors, then, is if hard data resilience can persist should consumer sentiment continue to weaken. Poor sentiment could lead to a self-fulfilling prophecy, where spending slows due to fears over the future. But even though risks have risen, and despite the fact that the pace of growth seems more moderate than in recent years, we think growth can still hold up given strong consumer and corporate balance sheets.

Near-term uncertainty can be uncomfortable for investors, but let’s consider the full picture. The S&P 500 decline has been relatively concentrated. The Magnificent Seven (i.e., Tesla, Amazon, Google, Microsoft, Nvidia, Apple and Meta) comprise over 30% of the S&P 500’s market capitalization and are responsible for most of the index’s pullback. The S&P 500 was down -5.6% in March, while an equal-weighted version of the S&P 500 fell by 3.6%. To us, the pullback is more a slight reversal of concentrated tech optimism after strong outperformance in recent years, rather than the start of a broader downturn. Overall, our year-end outlook on U.S. equities remains positive.

The underdog upset: European equities

As anyone with a fantasy NCAA bracket will tell you, having multiple brackets is key so that when one inevitably gets busted, the others might still have a shot at winning. Interestingly, this mindset mirrors the investing principle of diversification pretty closely. While U.S. equities declined in March, European equities remained relatively stable with a slight 0.5% decline. This underscores the role geographic diversification can play in portfolios.

The news of Germany’s historical fiscal spending package, which was approved last month, further bolstered European stocks’ momentum. This spending package includes a 500-billion-euro infrastructure fund and reforms to the country’s debt rules, potentially addressing years of underinvestment in defense and infrastructure. This could boost Germany’s economic output over the coming years and is already giving businesses a boost of optimism. In March, the Ifo Business Climate Index for Germany rose to 86.7 – its highest level since July 2024 – from February’s 85.3. This is a welcome sign for Germany, which has seen consecutive years of weak economic activity.

Our 2025 Outlook discussed the thesis that global security spending has room to grow. We’re keeping a close eye on European equities’ earnings and if other countries follow Germany’s lead increasing spending in these sectors.

Asset class diversification: No fantasy brackets here

Some investors may have grown wary about the efficacy of using fixed income to diversify portfolios after years like 2022, when fixed income had an unusual positive correlation with equities (both experienced negative returns). However, March showed that during growth slowdowns, fixed income can provide portfolios a layer of protection from stock market drawdowns. While U.S. equities were down, the U.S. Aggregate Bond index was flat for the month.

Our base case remains that the Federal Reserve will cut interest rates twice this year. The potential for falling cash rates and relatively high starting yields on core bonds support fixed income’s status as an attractive part of multi-asset portfolios.

Fixed income isn’t the only tool investors have for diversifying portfolios, though. Throughout the tariff announcements in the first quarter of 2025, gold has outperformed the S&P 500 and reached record highs in March. This rally was driven by geopolitical uncertainties, trade tensions, economic growth concerns and increased central bank purchases, particularly by China. With uncertainty remaining, investors have been seeking a safe-haven asset.

The benefits of asset-class diversification were apparent in March; while U.S. equities faced heightened volatility, investors with a portfolio of 60% equities and 40% fixed income were better positioned to weather the storm, experiencing just a 2.6% decline. By including diversifying assets like gold or fixed income in portfolios, investors may enhance stability and income potential. We recommend reviewing asset allocations to ensure they align with your risk tolerance and goals.

April showers?

Until there’s more clarity on trade policy and further insight into how hard economic data responds to the dip in consumer sentiment, we anticipate that equity market volatility will continue. During bouts of volatility, it’s important to remember that as investors, there has been (and will always be) something to worry about. But through all of the challenges and risks markets have faced over the last two-and-a-half decades (e.g., the Global Financial Crisis, the COVID-19 pandemic, etc.), investors who have stayed the course have typically benefited from strong cumulative returns.

In this market environment, diversification across sectors, asset classes and geographies – along with maintaining a long-term perspective – are key to preventing volatility from derailing long-term goals. As always, a J.P. Morgan Wealth Management advisor is here to help provide guidance and support as you make informed investment decisions that are aligned with your goals and risk tolerance.

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