Trade-War Volatility: Friend Or Foe For Retail Investors?

Forbes

4 hours ago

The front page of the Brooklyn Daily Eagle newspaper with the headline 'Wall St. In Panic As Stocks ... More Crash', published on the day of the initial Wall Street Crash of 'Black Thursday', 24th October 1929. (Photo by FPG/)
Earlier this year, the trade war wreaked havoc on investors' portfolios. That's particularly true in early April as volatility soared and the S&P 500 teetered toward a bear market. But by the end of the second quarter, the index had found its way back to fresh all-time highs.
With heavy volatility sending shockwaves through the stock market, investors aired their (obvious) grievances on how the US's approach to global trade policy has impacted markets.
But was it actually…a good thing?
The immediate answer is a resounding 'no' — and that response is even louder if the trade war were to send inflation shooting higher and push the global economy into a recession. And to be clear, some of that risk is still present.
However, it may be worth exploring whether these types of events are actually good for the everyday investor.
Volatility Can Bode Well For Retail Investors
Let's not sidestep the reality, which is that volatility makes for very difficult investing environments.
Even for investors who make routine, automated purchases in index funds, it can be difficult to embrace a scenario where 20% (or more) of your equity investment evaporates in the span of a few weeks. Throw in the reality that bonds have done little to soften the blow this time around, and the traditional investor in US stocks and bonds didn't have a great start to the year.
Yet, those who stayed the course were ultimately rewarded.
The S&P 500's annual returns since 1942
Whether it was active investors aggressively buying the dip — from our vantage point, eToro US clients logged their highest number of 'equity buy orders' in over a year on April 7th, the day the S&P 500 bottomed — or steadfast long-term investors sticking to their dollar-cost averaging strategy, those who bought the dip should be pleased. As Q2 draws to a close, their portfolios likely look much stronger than they did at the end of Q1.
Volatility is a measure of emotion. But despite the fear and anxiety that comes alongside high-volatility environments, retail investors are learning that sometimes they need to close their eyes, buy, and hold. That's as long-term returns favor time in the market.
Sometimes the rebound takes longer than anticipated. Other times — like now — the rally is quite fast. But at the end of the day, leaning into volatility is often a better strategy than panicking from it.
A Reminder on Diversification
As I write this, we're approaching the halfway mark of the year and the S&P 500 is barely above water. Yet gold prices are up almost 25% this year and 40% over the past 12 months. Bitcoin is up 14% and 74% in the same stretch, respectively. European equities are doing well this year too, with the German DAX up 20% and the UK's FTSE up 7.5%. Chinese stocks — like the FXI ETF — are up considerably this year, too.
We're seeing strength across the board, except in the one asset that has become the most popular investment in town — US stocks.
A look at the performance for various assets YTD 2025 and over the past 12 months.
If the first half of 2025 served up any sort of reminders, it's that volatility can flare up in a hurry — to illustrate, the S&P 500 fell roughly 20% in about six weeks — and that diversification can help steady the ship when we see those volatility spikes.
For example, take gold.
Not only is gold considered a 'safe haven' asset, but it has actually performed quite well down the stretch. It's outperformed the S&P 500 in three of the last five years and in four of the last seven years. Short of a massive second-half reversal, it will likely outperform US stocks again in 2025.
The Bottom Line on Volatility
Let's be clear: The trade war is not good for the global or US economy. PR teams can spin it however they want, but it's not making life easier for businesses or consumers. That's not a win-win situation.
I'm sure investors would have been happier in a scenario where they coasted to a 5% to 10% mid-year gain in the S&P 500. However, bursts of volatility — be it from an unwinding currency trade or from events like 'Liberation Day' — do give patient, long-term oriented investors an opportunity.
Obviously, that's easier to say with the S&P 500 now at record highs, and admittedly, the tone would be much different if we had a trade-war-fueled recession on our hands. But as Morgan Housel noted — and I'm paraphrasing — 'volatility is the fee we pay for enjoying longer-term returns' and that advice has continued to ring true time and time again.