Broad Change Drives Volatility

In its second term, the Trump Administration has set its sights on restructuring the fiscal house. In return, volatility has been robust in 2025 with the future of global trade, monetary policy, and federal spending being unclear. The Trump Administration seems well aware of the disruption and appears prepared to weather short-term economic pain. When asked if policy changes would lead to a recession, President Trump offered his perspective by stating¹:

“I hate to predict things like that. There is a period of transition because what we’re doing is very big.”

“Look, what I have to do is build a strong country. You can’t really watch the stock market. If you look at China, they have a 100-year perspective.”

While the new administration is stealing headlines, investors should not forget about the lagging effects of the U.S. Federal Reserve (the Fed) activity – rapidly increasing interest rates beginning in 2022 followed by cuts in 2024. A review of ‘Volatility & the Fed’ recalls the important impact of interest rate management and volatility:

• Once the Fed raises rates, data suggests substantial and sustained increases in volatility approximately two years after interest rates were increased.
• Two years after an interest rate cut, when rates are 3% or higher, the Cboe^® Volatility Index (the VIX^®) averages greater than 22. When rates are 3% or less, the VIX^® average is closer to 17 two years after a cut.

The VIX^® closed at 27.86 on March 10, approximately three years after the Fed’s most recent bout of rate increases. Since 1990, the VIX^® has averaged 19.46.

Also important to note is the potential for equity declines during periods of transition, as investors have recently experienced. Since 1990, data suggests an average equity market drawdown of approximately 19.5% following a reduction in interest rates. The duration of such a drawdown ranged from just two weeks to twelve months.

There is positive long-term potential in equity markets, albeit mired in catalysts for higher implied volatility. Investors looking to maintain exposure to the upward potential of the equity market while benefiting from periods of transition should consider Gateway’s unique and customizable approaches that can benefit from expected – or unexpected – volatility.