Animal Spirits and Algorithms: The Everything Volatility
We are living in an era where everything moves together—tech stocks, Bitcoin, commodities, and bonds—soaring in unison, crashing in unison. The recent “everything rally” wasn’t just driven by fundamentals but by liquidity, momentum-chasing algos, and investor psychology—what Ben Graham might have called ‘Mr. Market’ in full mania mode.
At the same time, the new “everything volatility” is just as pronounced. Markets no longer wait for Fed meetings or earnings reports; they swing wildly on a tweet, a viral post, or a geopolitical headline. Quants don’t just trade on news—they scan Reddit, X (Twitter), and financial media for fear or euphoria, executing trades in milliseconds.
None of this is new—only accelerated. The 2010 book The Quants explored how mathematical geniuses built algorithms that fueled massive gains but also contributed to the 2008 financial crisis. Today, those same forces drive the frenzied feedback loops defining modern markets with nearly 50% of volatility due to high frequency trading. The best way to navigate this volatility is to stay calm, remain strategically diversified, and avoid panic-selling into the storm as the markets may overshoot both up and down before fundamentals take hold.
Animal Spirits: Human Nature Meets High-Speed Trading
The term “animal spirits,” popularized by John Maynard Keynes, describes the emotions and instincts that drive economic and market behavior—fear, greed, confidence, panic. Traditionally, these forces were shaped by human sentiment: investors reading economic tea leaves, reacting to earnings reports, or speculating on the future.
But today, animal spirits have merged with algorithms, amplifying volatility. Markets no longer react solely to interest rates, earnings, or economic cycles. They are now hardwired into a system of quants, high-frequency traders, and AI-driven funds that react to every signal—real or perceived—at the speed of light.
In past cycles, investors took time to digest news and adjust their positions. Today, algos don’t hesitate—they scan, interpret, and execute instantly, feeding the animal spirits in a perpetual feedback loop of volatility. A market that once took weeks to process bad news now overreacts within minutes—only to correct itself just as quickly.
This explains why sudden crashes are often followed by equally sharp rebounds. Mr. Market today is both hyper-rational and wildly emotional, all at once. In this new paradigm, volatility is the new normal. The takeaway? Don’t chase headlines or make irrational moves in the short term if you have a diversified, balanced portfolio—but adjust where necessary.
Market Outlook: From Euphoria to Reality
The recent selloff across various stocks, sectors and crypto, with some plunging into correction and crash territory, serves as a stark warning to investors. The once-powerful momentum of the AI craze and the so-called “Trump bump” has dissipated, bringing major indices back down to November 2024 pre-presidential election levels.
Key question: Is this downturn a contrarian buying opportunity fueled by deregulation, government cost-cutting, and sustained tax cuts? Or a reason to stay cautious amid renewed trade war tensions? We lean toward short-term caution, given a slowing economy, a declining 10-year Treasury yield, and rising expectations for Fed rate cuts in 2025. With the trillions of cash previously injected into the economy by both the Trump and Biden administrations now fading, the real test begins: Can corporate America thrive on its own with moderated inflation, cost cutting and job cuts?
Jon here. For long-term investors, the key is to separate the signal from the noise. This isn’t a moment to panic, nor is it an all-clear to buy every dip. The S&P 500 may still have room for mid-to-high single-digit returns this year at best, but the easy gains are gone. With trade uncertainty, a shifting Fed, and economic moderation, navigating the next phase of the cycle will take more than just riding the trend—it will take discipline, patience, and an understanding that algorithms may drive the daily action, but fundamentals win in the end.
Trade Wars and Market Risk
Trade headlines continue to weigh on markets as new tariffs go into effect. President Trump recently confirmed tariffs on Canada, Mexico and China, dashing hopes of more extensions or last-minute deals. Additional tariffs are expected in the coming months, including reciprocal ones against countries that impose duties on U.S. goods.
Investors worry that a trade war could raise prices for consumers and businesses, slowing economic growth. As a result, the stock market has pulled back in recent days across major indices and sectors.
Why Tariffs are a Concern
While market swings are never pleasant, it’s times like these that personalized, well-constructed portfolios and financial plans truly shine. Just as markets pulled back on trade war concerns in 2017 and 2018, investors have been on edge since the presidential inauguration. History shows that markets can overcome these concerns in the long run (as we saw a significant rebound by U.S. stocks in 2019), even if the day-to-day swings are uncomfortable.
Tariffs can be concerning because they represent taxes on imported goods that can then be passed on to buyers. With inflation rates still hotter than many would like, tariffs could add further pressure to both CPI and the prices of everyday necessities. This is made worse if other countries retaliate with their own tariffs, sparking an escalating trade war. As the accompanying chart shows (above), the U.S. runs a significant trade deficit with many major trading partners.
It’s important to keep this round of tariffs in perspective. First, the U.S. has a long history of using tariffs dating back to the Industrial Revolution and hitting a peak during the Great Depression. The goal of tariffs is often to protect domestic industries, especially when they involve important or sensitive sectors, such as technology and national security.
Second, the previous round of tariffs during President Trump’s first administration led to trade deals with Mexico, China, and others. For the administration, tariffs are often used as a negotiating tactic for other policy objectives, such as curbing unauthorized immigration or imports of illegal drugs.
Third, market reactions to tariff announcements often prove more dramatic than their actual economic impact. This is especially true if tariffs are short-lived or if deals are reached. While markets were choppy from 2017 to 2019 when trade wars were a concern, markets generally performed quite well.
While today’s trade war concerns differ in some ways from previous episodes, they are a reminder that market fears don’t always translate into reality.
Market pullbacks are a normal part of investing
Given the market’s recent swings and the constant news coverage, the S&P 500 has pulled back about 5% at the time of this writing. While this can be unpleasant, the reality is that market pullbacks of this magnitude occur on a regular basis. Pullbacks of this size or worse occurred twice in 2024, three times in 2023, and a dozen times during the 2022 bear market.
With markets reaching new all-time highs over the past few years, some investors may have grown accustomed to markets only moving in one direction. While the current year-to-date performance may not be what many hoped for at the beginning of the year, when much of the focus was pro-growth policies, many aspects of the market remain positive.
For example, corporate earnings grew at a strong pace this past earnings season. Unemployment is still historically low at 4.0%, wages are rising, and productivity growth remains steady. From a risk perspective, high yield credit spreads remain well below pre-pandemic levels. This suggests bond investors are less nervous about growth prospects than the stock market.
Not Everything is Moving in the Same Direction
While technology stocks have struggled, other sectors have performed well over the past several months. Other asset classes and regions have also performed well, reminding investors of the importance of a balanced portfolio. Bonds, for instance, have benefited as interest rates have fallen. As they often do in difficult market environments, positive bond returns have helped to offset stock market declines in diversified portfolios.
History shows that maintaining a long-term approach remains one of the most effective strategies for navigating market volatility. While short-term market swings can be unsettling, investors who stay consistently invested through market cycles have historically captured the benefits of compound returns.
So, although there will be more trade headlines in the coming days, it’s important to remember that investing is not about a single day, week, or month. Instead, building and holding a well-constructed portfolio is about achieving financial goals over years and decades.
The role and importance of tariffs have changed over time
Market reactions to tariff announcements often prove more dramatic than their actual economic impact. During Trump’s first term, markets generated healthy returns despite fears of trade wars. The trade disputes of 2018 and 2019 did not result in the severe global consequences many anticipated. Tariffs during this time were used as a negotiating tool, resulting in the United States-Mexico-Canada Agreement (USMCA) and a trade deal with China.
In the chart above, tariffs fall under the “Other” category and contribute only 1% to 2% of total government revenue, highlighting how insignificant they are relative to taxes. That said, many politicians and economists would like to see the trade balance improve. This could potentially strengthen domestic manufacturing, increase employment in export-oriented industries, and reduce reliance on foreign borrowing.
On the other hand, the trade deficit also reflects the underlying strength of the U.S. economy and consumer purchasing power. When Americans have more disposable income, they can afford to buy more imported goods, naturally leading to a larger trade deficit. Furthermore, the deficit is partially offset by significant capital inflows into U.S. markets, as foreign investors seek the stability and opportunities available in American assets. This investment helps fund innovation, business expansion, and job creation domestically.
The bottom line? ? In this new era of “everything volatility,” where animal spirits and algorithms amplify both fear and greed, maintaining a long-term perspective is critical. While past trade wars created uncertainty, the economic environment today is driven by a far more complex set of forces. As we navigate 2025, staying disciplined, global growth diversifying wisely, and not overreacting to market noise will be essential to achieving financial success
Ultimately, while Trump’s trade policies contributed to short-term market turbulence, the broader economic landscape—monetary policy, corporate earnings, and trends—played a more significant role in shaping investor outcomes.
For more information on our firm or to request a complementary investment and retirement check-up with Jon W. Ulin, CFP®, please call us at (561) 210-7887 or email jon.ulin@ulinwealth.com.
Diversification does not ensure a profit or guarantee against loss. You cannot invest directly in an index.
Note: This content is for informational purposes only and should not be construed as financial, legal, or tax advice. Please consult your financial advisor, attorney, or tax professional regarding your specific situation.
You cannot invest directly in an index. Past performance is no guarantee of future returns. Diversification does not ensure a profit or guarantee against loss. All examples and charts shown are hypothetical used for illustrative purposes only and do not represent any actual investment. The information given herein is taken from sources that are believed to be reliable, but it is not guaranteed by us as to accuracy or completeness. This is for informational purposes only and in no event should be construed as an offer to sell or solicitation of an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as NewEdge Advisors, LLC does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors.
