5 Moves To Consider Amid Historic Stock Market Meltdown

Over the past few weeks the U.S. stock market has suffered a breathtaking meltdown. The S&P 500 is now down roughly 14% so far in 2025 and is down 17% from its all-time high reached in January 2025. The market sell-off has accelerated over the past few days with roughly $6.6 trillion in market value lost in the U.S. stock market over the past two trading days, the largest two day wipeout of shareholder value on record. The primary cause of the meltdown has been a sweeping shift in U.S. trade policy by the Trump administration and retaliation from a number of key trading partners.

While the near-term outlook for the market is uncertain, the meltdown has created opportunities for level headed investors willing to take a long-term view. Additionally, the ability for investors to take advantage of the recent meltdown is highly dependent on having been positioned reasonably well prior to the sell-off.

The definition of “positioned reasonably well” depends on individual investors circumstances but, in my view, at a minimum includes having a solid amount of diversification (i.e. owning bonds, international equities, and perhaps other diversifying assets such as gold.) Reasonably well positioned also means not taking more risk that one can tolerate (for example avoiding the use of leverage through margin loans or equity futures contracts.)

During times of market volatility many market pundits often focus on whether investors should sell in hopes of avoiding further declines or should use the opportunity to buy the dip in hopes of a market rebound. While one of my five moves to consider will address my view on this, the other four are actions which are broadly risk neutral intended to optimize portfolio performance.

Before getting into five moves to consider making now, I want to provide a performance update on the Blue Chip Portfolio’s Moderate Risk Portfolio. As shown by the table below, the portfolio is currently down 6.3% on a YTD basis. Comparably, the portfolio’s 60/40 benchmark is down 6.9% on a YTD basis. The model portfolio’s solid outperformance thus far in 2025 during a challenging market backdrop follows outperformance of 2.3% during a much stronger market backdrop 2024. Thus far in 2025, the portfolio has benefited from having modest exposure to gold as well as a more diversified equity portfolio. Model portfolio allocations to International equities and defensive sectors such as Utilities, Consumer Staples, and Healthcare have helped shield the portfolio from the sharp sell-off in the market cap weighted U.S. indexes.

1. Consider buying the dip in U.S. equities

Warren Buffett has said famously said:

“Investors should be fearful when others are greedy and greedy when others are fearful.”

Given the fact that the U.S. stock market has suffered one of its largest two day declines on record and is now down 17% from its all-time high, I believe it is reasonable to say that most investors are fearful right now. Another important indicator of fear, the VIX, has spiked above 45 to levels not seen since the early days of the COVID-19 induced market sell-off.

Unlike COVID-19 or the Global Financial Crisis in 2008/2009 which were both caused by exogenous shocks, the current market meltdown is has been entirely self-inflicted due to the Trump administration’s aggressive trade policies. Thus, despite the uncertainty I believe that actions can and will be taken to stave off a broader economic crisis. One potential positive would be if the U.S. is able to negotiate with trading partners to come to a deal which would see tariffs reduced from current levels or removed entirely. I think it is unlikely that tariffs will be removed entirely but I definitely see scope for negotiation. Trump has already said he would be willing to make a deal with China to lower tariffs if it approves a sale of TikTok. Another potential positive would be if Congress is able to act and pass legislation which provides tax relief which is intended to offset the massive consumption tax increase which will occur if tariffs remain in place at new elevated levels. Finally, it may turn out that the U.S. economy will find it easier to absorb high tariffs than is currently assumed. One reason why this is possible is that the U.S. is expected to run a roughly $2 trillion budget deficit in 2025 (excluding the impact of tariffs.) If tariffs result in an additional tax of roughly $600 billion per year (which would be the largest tax increase in U.S. history) then U.S. fiscal policy will still remain highly expansionary despite this massive tax increase. Fed rate cuts and lower mortgage rates could also help offset the negative impact related to high tariffs.

One important thing to note is that this option is really only available to investors who are not already over exposed in terms of portfolio risk and the ability to tolerate additional downside. Moreover, given near-term uncertainty buying the dip only makes sense for investors with a longer-term investing horizon.

2. Consider taking advantage of tax loss harvesting opportunities

The move lower in equities and some other asset classes has created tax loss harvesting opportunities as more securities are now held at a loss than was previously the case. In the U.S., individuals tax payers have the ability to use up to $3,000 worth of capital losses to offset ordinary income (which is typically taxed at higher rates.) In addition to using tax loss harvesting to offset some ordinary income, tax losses can also be used to offset capital gains on other trades (for example reducing exposure to a highly appreciated single stock which has become an outsized position in the portfolio.)

One thing to keep in mind in regards to tax loss harvesting strategies is that investors seeking to implement this strategy must avoid purchasing a “substantially identical security” to the one which they sell.

3. Consider reducing single name concentration risk

The U.S. stock market meltdown has impacted the vast majority of U.S. stocks. While some stocks are down more than others, the overall move lower in the value of stocks has generally reduced the size of unrealized gains on long-held positions. As such, investors seeking to diversify highly concentrated single name stock risk could consider using the market decline to rotate concentrated single stock risk into more diversified market index oriented products. While highly appreciated holdings are still likely to have significant unrealized gains, the size of the gains is significantly less than it was just a few weeks ago. Moreover, this move can be combined with the tax loss harvesting strategy mentioned above to further reduce the potential tax cost related to diversifying single name risk.

Historically, just 4% of stocks have accounted for all of net shareholder wealth creation since 1926. Given this fact, diversification is a critical risk reduction tool as too much concentration in a portfolio can result in higher levels of risk without a higher expected return. However, investors are often reluctant to sell highly appreciated stocks which become a large part of their portfolio due to the tax implications.

4. Consider swapping out of mutual funds and into ETFs

In my previous piece ETFs vs Mutual Funds: A Few Things You Need To Know, I outlined the key reasons why ETFs having been taking share from mutual funds. Perhaps the most important driver of increased ETF adoption relative to mutual funds is the fact that they tend to be more efficient from both a fee and tax standpoint. The combination of lower fees and more tax efficiency (due to avoiding unwanted capital gains distributions) has, in my view, given ETFs a clear leg up relative to mutual funds offering similar exposures.

Despite the advantages of ETFs, many investors continue to hold mutual funds. One reason for this is that some mutual funds have appreciated in value significantly and thus investors would incur significant capital gains in the event they decided to swap into ETFs. The recent market decline has reduced the unrealized capital gains positions that investors may have in their mutual funds and likely makes swapping into ETFs less expense from a tax perspective than was the case previously. It is important to note that gains related to mutual fund to ETF switches have the potential to be offset from a tax loss harvesting strategy previously discussed.

5. Consider reducing emerging market equity overweights in favor of U.S. equities

Despite the fact that emerging market (“EM”) economies tend to be higher risk in nature and more exposed to economic challenges, the MSCI EM Index has significantly outperformed the S&P 500 during the recent market sell-off. On a YTD basis, as shown by the chart below, the MSCI EM Index is now down just 3% compared to a 14% decline for the S&P 500.

The strong relative performance of EM equities is surprising given the fact that some of the highest tariffs have been imposed on these countries. The two largest countries in the EM index, China and India, are facing new tariffs of 54% and 26% respectively. Both of these countries have large trade surpluses with the U.S. and their economies stand to take a substantial hit if trade tensions continue to increase. For this reason, I expect EM equities to suffer substantial losses if trade tensions continue to increase. Such a scenario is not my base case but is indeed a possibility.

While I believe there is still a role for EM equities to play in a diversified portfolio (e.g. the 4% allocation in the Blue Chip Portfolios Moderate Risk Portfolio), outsized exposure to EM equities is risky in the current environment given the trade risks. Additionally, I expect EM equities to underperform U.S. equities if trade tensions were to fall as U.S. equities have experienced a much larger sell-off already. Given this, I view recent outperformance as an attractive opportunity to reduce any pre-existing overweights to EM equities and would re-allocate towards U.S. equities which have become more attractive given the recent sell-off.

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