Should I Be Concerned About The Financial Markets?
We start the final quarter of 2025 with an investment environment that is complex and depending on the metric, contradictory. There are a number of indicators attracting our attention and we reflect on these in this article to address two key questions:
Should you be concerned about the financial markets?
andShould you make any changes to your investment portfolios?
First let’s look at the defining characteristics of the financial markets, and the economy we are in right now. I mention both because, as has oft been stated this year, the stock market does not equal the economy.
The overriding theme of 2025 has been the increased uncertainty and unpredictability arising from the US as they seek to redefine their position and role in the world. Tariffs dominated the first half of 2025 and negotiations are ongoing. Their direct impact on markets is more muted now, however their influence on the US economy is coming into sharper focus with recent jobs and productivity figures being lower and inflation potentially increasing, although being held back a reduction in spending- elements of a nascent economic slowdown.
The tariff announcements earlier this year caused stock market and bond market volatility in quarter two 2025 and we wrote about it in detail at the time. You can refresh your memory here. At that time when markets corrected due to the tariff announcements we advocated for investors with a longer time frame to not be reactive and the subsequent recovery validated our position.
Two things happened with the correction and recovery, and both these are front and centre in our market assessment now. These are the rapid depreciation of the US dollar, and a tech/AI stock rally (some commentators are beginning to use the world bubble).
The US dollar had its worst start to a year since 1973! On the day before the US tariffs were announced it was trading at 0.96 cents to the Euro. By June 2025 it had fallen to below 0.85 cents. It has been relatively stable from June to September trading between 0.84 and 0.85 cents to the Euro. This loss of value had a substantial impact on investors that were invested in Euros. That will be most people living in Europe. Below are two graphs to illustrate this.
Graph one, as we see in news reports, the US stock market captured in the S&P500 index is up 14.2% year to date at time of writing. The second graph shows a very different picture: the same S&P500 index when converted to Euros has a year to date performance of less than 1%. That is a very different experience. All the returns of the stock market were eroded by the weakening US dollar.
So point one: if you are looking at your Euro investment portfolio and wondering what is happening, this could explain a lot.
Graph One: The US Stock market S&P500 in USD YTD to 30 Sep 2025
Graph Two: The US Stock market S&P500 in EUR YTD to 30 Sep 2025
The second factor is the tech centric rally. We wrote in our article last week about the dangers of index investing in this market and it is very relevant to this topic. Read up on that here. Much of the stock market rally as illustrated in the USD graph above came from the share price of companies invested in technology and specifically AI. It is starting to feel like an AI sector bubble. The danger of being a passive index investor is that whilst you are theoretically invested across the 500 companies making up the index, proportionately, the ten largest companies account for 40% of that index’s value. And most of that top ten are tech/ AI related corporations. Therein lies the risk. If there is a correction in the tech company sector, it will drag the index lower.
At the time of writing the US government is in financial lockdown, with no sign of it easing quickly. This will create more market uncertainty as the steady stream of economic data released every week is suddenly not available. We have seen several US government lock downs over the years and it will resolve at some point, but in the meantime there is more uncertainty, and markets do not like uncertainty.
Back to question one: should you be concerned about the financial markets?
It is always wise to be aware of what is going on, or to have a financial adviser that is aware. At the moment the team at Black Swan Capital are alert and observant but not fearful. We know that across all our clients, any short-term market movements will for some be irrelevant, maybe an opportunity for some clients, and a risk to be avoided for others. Therefore, the approach will be different for different people.
The factors that help determine the potential impact for you include your risk profile, your time frame, and what we call your capacity for loss. This is the immediate and long-term impact of a negative market movement on your life goals.
For all our clients that are particularly risk averse, and those with a short (less than 3–5-year timeframe), it is worth discussing whether a defensive preventative action is worthwhile now. If you don’t fit this definition but you would still like to discuss your concerns, free to contact us and we will be happy to speak with you.
Question two is Should you make any changes to your investment portfolios?
The second question was partially addressed above. As we stated above whether you should make changes to your portfolio will depend on time frames, expectations of return, risk profile and personal situation.
When we are in times of increased volatility and heightened uncertainty it is wise to remember the phrase Retrospective predictability. It is one of our favourite messages. It was coined by the Nassim Nicholas Taleb as one of the characteristics of a Black Swan event, his theory that gave risk to our name.
Retrospective predictability is when we look back at an event that occurred in the past we can be fooled into thinking that we knew it was going to happen and how it would play out. In reality, in real time as an event is unfolding it is rarely the case.
Let us consider the market correction in March and April this year. As it happened no one knew how far markets would fall, when they would bottom out, how long they would stay down or how quickly they would recover. Looking back at the graph, we can identify optimal times to make investment decisions, but they are only apparent after the event, when it is too late. Retrospective predictability reminds us that in the moment we don’t know what will happen next.
This can be demonstrated in a hypothetical example: an investor is worried about the market and so exits all investments and holds cash. In the next six months the market continues to grow another 15%- growth our investor has missed out on. Then after six months the market does correct and it drops 15%. However, it has dropped from a higher position and less than the returns in the intervening period. In this scenario the investor would have been better off had they remained invested. It doesn’t always happen in this way, but it is a useful illustration, that being defensive when you don’t need to be can be more risky than staying invested.
The application of this aphorism is that we need to remain focused on our objectives and not be distracted into short term reactive movements.
In summary, we are in a time of increased uncertainty and there are some metrics that suggest higher risk in some sections of financial markets. How this applies to you, your investments, and the attainment of your life objectives will be specific to your situation. Speak with us if you have any concerns or questions and we will continue to make sure you remain on track with your financial plan.
