Market Update: Is it a Correction or Something Bigger?

What do you do when the market takes a turn you didn’t expect? Do you panic? Do you make quick decisions? Or do you take a step back and look at the bigger picture?

As we step into the first few months of 2025, the market has given investors plenty to think about. Stocks started the year on a strong note, but since then, we’ve seen a pullback. The S&P 500 briefly entered correction territory, bringing its year-to-date return down to -5%.

Similarly, the Nasdaq 100, home to some of the biggest names in tech, is down 7% this year, while the small-cap Russell 2000 has fallen 9%. And the what about the Magnificent 7 of  Microsoft, Apple, Meta, Alphabet, Amazon, Nvidia, and Tesla? They’re down nearly 15%.

So what’s really going on? More importantly, what should you do about it?

What’s Behind the Market Selloff?

Well, it’s easy to blame market swings on one big event. But in reality, it’s rarely just one thing because there are likely a few reasons this year’s recent pullback.

First, the stocks that led the charge last year are the ones struggling the most today. And it’s not unusual to have yesterday’s winners become today’s laggards. Indeed, figure 2 shows us that the biggest winners of 2024, like tech stocks and the Magnificent 7, have become 2025’s underperformers.

Why?

Because last year’s rally was built on enthusiasm, especially around artificial intelligence. And when enthusiasm drives prices higher, valuations get stretched. Investors pile in, positioning gets crowded, and eventually, the weight of that momentum starts to break down.

That’s what’s happening now.

Second, investors, both individual and institutional, came into 2025 with a high level of exposure to stocks. In fact, some of the largest institutional investors like pension funds, endowments, and insurance companies held a record share of their wealth in equities.

And that strategy works well when markets are climbing, but when momentum reverses, institutional investors start deleveraging. And when they unwind positions quickly, it amplifies the selling pressure.

Finally, there’s the policy backdrop. What started as optimism around pro-growth policies under the Trump administration has shifted to uncertainty. As we’ve written about before, concerns about spending cuts and the impact of tariffs have raised questions about economic growth.

Because the fact of the matter is that investors don’t like uncertainty, and right now, they’re adjusting to a new, highly uncertain reality.

Market Volatility vs. Economic Reality

So, does all this mean the economy is struggling? That’s a great question. And here’s where we need to separate perception from reality.

The stock market reacts quickly to new information, but that doesn’t always mean the economy is following the same path. One way we can test that is by looking at real-time economic data.

For example, the Federal Reserve’s Weekly Economic Index (WEI) tracks real-world activity using data points like unemployment claims, rail traffic, steel production, and tax withholdings.

And right now? It’s still positive (Figure 3).

Another piece of the puzzle is the bond market. High-yield credit spreads, which are essentially the difference in yield between risky corporate bonds and safer U.S. Treasuries, are a great way to measure financial stress.

And today, those spreads remain near all-time lows (Figure 4). Indeed, if we were facing a deeper economic problem, we’d expect to see those spreads widen. The fact that they haven’t tells us this market selloff could be more about repositioning than it is about a fundamental crisis.

With that said, no one rings a bell when we’ve entered a recession. And it’s very well possible that a policy error from the current administration could push the economy into a downturn. For now, however, the data continue to reflect modest economic growth.

Is This Normal and Can the Market Selloff Continue?

Now, if you’ve been investing for a while, you likely know that market volatility isn’t new. But let’s be honest, knowing that doesn’t make it feel any better when stocks drop, does it?

So what should you do?

Well, one of the best things we can do is put this moment in perspective. For example, since 1928, the S&P 500 has experienced a decline of 5% or more in 91 of the past 98 years.

Read that again.

In almost every year on record, we’ve seen the market pull back like this. And yet, time after time, markets have recovered. Investors who stay the course, who focus on the long-term, are the ones who have been rewarded.

So let me ask you: What’s your plan?

Because the difference between reacting and responding is having a plan. The key isn’t trying to predict every market move. It’s making sure you’re positioned to succeed no matter what happens next.

And that’s why sticking to a disciplined process and having a long-term perspective matter over the long-run.

The Bottom Line

Market volatility often feels personal. It’s your retirement savings on the line, isn’t it?

And so, when you see headlines about market swings, it’s easy to wonder, “Is this the beginning of something bigger? Am I missing something? Should I be doing something differently?”

So then, if that’s where your mind is right now, you’re not alone.

But more importantly, you’re not powerless. You don’t have to let fear dictate your financial future. You can make decisions based on a thoughtful strategy rather than short-term emotions.

Whether you’ve been working with our team for years or you’re just starting to explore your options, here’s what I want you to hear: clarity, confidence, and peace of mind don’t come from guessing the market’s next move. They come from knowing you have a plan that’s built for moments like this.

Because at the end of the day, the market will move up.

It will move down.

That’s a given.

But those who stay focused on the long term, those who stay diversified and patient, won’t just weather today’s volatility. They’ll be in the best position to thrive beyond it.

So, the real question isn’t what will the market do next? The real question is: Are you ready for whatever comes next?