As you might guess from the name on the door, Longwave takes a long-term view on economic and market cycles. Over 20 years of experience, we have witnessed many times how sentiment can quickly turn from optimism to pessimism and vice versa. In 2025, it only took a few weeks for economists’ mood to flip from confident to cloudy.

For many people, the mass firing of government employees, the shrinking of government services, the imposition of tariffs and the rollback of American soft (and hard) power have added a healthy dose of uncertainty about the future. People tend to like stability so it shouldn’t be surprising that consumers, businesses and investors are now reassessing their expectations.

Indeed, over the last month, leading economic indicators have clearly deteriorated.

Consumer sentiment has dropped 27% since last year, according to the Survey of Consumers study.[i]
Inflation Expectations for 2025 have risen from 2.5% to 2.7%[ii]
A weakening job market - according to a study from Clarify Capital one in three Americans are now anxious about job security.[iii] Unemployment is predicted to increase to 4.4% by year end.[iv]
Economic Growth expectations for 2025 have been reduced from 2.1% to 1.7%.[v][vi]

Of all the White House policy changes we have seen so far tariffs could be the most economically consequential in the short term. It should be understood this saber rattling around trade is not entirely irrational. The most recently compiled data from the World Bank showed that the US had among the lowest tariffs compared to our trading partners. Torsten Slok, the Chief Economist of Apollo Capital Management, thinks the purpose of the Trump trade war is to create a more level playing field with our trade partners and support the US manufacturing sector.

Unfortunately, history is also clear that lengthy trade wars generally lead to higher prices – not just on imported goods but domestic goods as well, as they face less competition and higher input prices.

China, the world’s second largest economy is now facing overall duties of about 30% while goods from Mexico and Canada face 25% duties. Whether the average American can absorb these cost increases could determine whether our economy slows down later this year.

In response to this unpredictability, investors including many clients we speak with, are now bringing up the ‘R’ word – recession – and asking how bad will it be; are we positioned appropriately; and what should we do now?

Central banks and organizations like the IMF differentiate between two different kinds of recessions: crisis and confidence recessions.

A crisis recession is typically triggered by a sudden and significant shock to the economic system. The 2008 financial collapse is a good recent example of a crisis recession. Banks were collapsing, unemployment was sky high and home foreclosures were rampant. The stock market fell by half. While occurring less frequently, crisis recessions tend to be long and painful.

A confidence recession is driven primarily by a decline consumer and business confidence. This decline can be triggered by fears about the future, in economic uncertainty, or negative sentiment. When confidence is low, consumers close their wallets and purses, resulting in lower economic activity. In response, businesses scale back investment and fire workers. Eventually people need to start spending again on things like clothes, newer cars or home renovations and the economy picks up anew. Confidence recessions, which are much more common than crisis recessions, tend to be more gradual, shallower and with shorter recovery times.

Because we came into 2025 in relatively good economic shape, with banks solid, homeowners sitting on plenty of equity, and wealthier consumers continuing to spend, if there is a recession later this year, we believe it would be more of the confidence variety – a brief economic decline of 6-9 months followed by a gradual recovery.

This is not to minimize the pain of even a ‘mild’ recession, which would still be characterized by job losses, financial hardships and a market decline of 20–30%. Furthermore, in the past, government programs such as food assistance and social services acted as a shock absorber to economic slowdowns. With the removal of some of these safety nets by this administration, any economic slowdowns could drag out in unpredictable ways.

For long-term investors, the possibility of a 20-30% market decline should not be reason to change course. That type of loss typically occurs once every 4 years or so with the last such decline happening as recently as 2022.

Historically, one of the best defenses against a faltering US market has been diversification. The adjacent chart shows the divergence of asset class performance so far this year through March 18th. If you are in one of our 60/40 or 70/30 models, your portfolio value is just about flat for the year, after a very strong 2024.

At Longwave, we have prepared portfolios by diversifying, under-weighting the frothiest stocks in 2023 and 2024, and doing our best to gauge each client’s tolerance for volatility.

While not being an ironclad rule, generally a portfolio with a greater allocation to bonds will be less volatile. Consider the differing performances in 2008 between different stock/bond allocations:

Let’s put the last month into perspective: we are not close to a recession today. Even a few months or quarters of down markets should not materially impact your long-term financial health.

If you are feeling shaky however, ask us to discuss downshifting your portfolio to a more conservative allocation while markets are still relatively high. Then, plan to hold tight through any drops by avoiding news that might trigger your emotions.

What we want to avoid at all costs is panic selling if markets experience a more pronounced drop later this year. The greatest danger is trying to get off a roller coaster in the middle of the ride. When markets are volatile, many investors let emotions rule their decisions. Some panic and sell assets at market lows, erasing their previous gains. Others sit tight on cash and equivalents that might seem safer but hold back growth when markets recover.

Our final thought is a warning about trying to predict the future. Economists went into 2024 pessimistic and were proven wrong. They went into 2025 feeling optimistic only to see the economic mood quickly sour. In six more weeks, it’s not impossible for sentiment to shift again. ‘Staying the course’ is not just a platitude; it’s a tried-and-true path to investing success and, as such, remains our best recommendation.

This material is intended for informational/educational purposes only and should not be construed as investment advice, a solicitation, or a recommendation to buy or sell any security or investment product. Please contact your financial professional for more information specific to your situation.

All indices are unmanaged, and investors cannot actually invest directly into an index. Unlike investments, indices do not incur management fees, charges, or expenses. Past performance does not guarantee future results. Diversification does not assure a profit or protect against loss in declining markets, and diversification cannot guarantee that any objective or goal will be achieved.

[i] University of Michigan Survey of Consumers: http://www.sca.isr.umich.edu/

[ii] Reuters: Fed keeps policy rate outlook intact amid projected growth slowdown, temporary inflation jump: https://www.reuters.com/markets/us/with-interest-rates-hold-feds-economic-projections-take-center-stage-2025-03-19/

[iii] Clarify Capital: How Layoff Anxiety is Reshaping Job Security in 2025: https://clarifycapital.com/mass-layoffs

[iv] Reuters: Fed keeps policy rate outlook intact amid projected growth slowdown, temporary inflation jump: https://www.reuters.com/markets/us/with-interest-rates-hold-feds-economic-projections-take-center-stage-2025-03-19/

[v] Reuters: Fed keeps policy rate outlook intact amid projected growth slowdown, temporary inflation jump: https://www.reuters.com/markets/us/with-interest-rates-hold-feds-economic-projections-take-center-stage-2025-03-19/

[vi]The Conference Board: Economic Forecast for the US Economy: https://www.conference-board.org/research/us-forecast

Tariffs and Uncertainty Spoil the Market Mood… What Happens Next?