The stock market is like a river — constantly changing without knowing what lies ahead. Sometimes it’s calm. Other times it’s choppy. And when the stock market is choppy, it can leave investors in a dilemma, leading them to make irrational investment decisions.

The broader stock market indexes have been choppy lately, going up one day and down the next. Frequent news headlines such as tariffs, inflation data, and earnings influence market price action. This makes it a very challenging environment for investors. So how should you position your portfolio in this type of market?

Instead of chasing headlines, navigate the market by analyzing the overall trend and momentum. Start with the big picture before diving into individual stocks or exchange-traded funds.

The View From the Top

The S&P 500 ($SPX) has seen a lot of sideways choppiness (see daily chart of the S&P 500 below). After it broke out of the downward channel (blue dashed lines), it continued moving sideways with a series of lower highs. The up-and-down price action reflects the headline-driven characteristic of the market.

FIGURE 1. DAILY CHART OF THE S&P 500 INDEX. The overall trend remains bullish, but don’t be surprised if the consolidation extends further.Chart source: StockCharts.com. For educational purposes.

The index looks like it wants to reverse the “lower highs” series and resume its uptrend. It tried hard to hit a record close but, alas, closed shy of it on Friday. The new 52-week highs outnumber the new 52-week lows, which is a sign of healthy market breadth.

The overall trend is in favor of the bulls, as of this writing, but there’s a lot of hesitancy among investors. If we continue to see a headline-driven market, there’s a chance of an extended consolidation period. We need to see a breakout of the consolidation, with a series of higher highs and higher lows to confirm the continuation of the uptrend.

Expect to see more headlines in the near term. So far, we’ve seen the news rattling the market sometimes and, at other times, not impacting the markets at all. Tariffs, inflation, tax cuts, and deregulation are a handful of topics you’re likely to hear about in the near term. Let’s analyze how each of these factors will impact your investment portfolio.

Trade Tariffs

Trump has imposed 10% tariffs on China and 25% on steel and aluminum imports. He has delayed tariffs on Canada and Mexico but is still scheduled to impose them in early March. President Trump was expected to sign an order for reciprocal tariffs, but that turned into a memo requesting a plan of action for these tariffs. This could take a few months to get implemented. The market was quick to shrug this off.

There’s no doubt that tariffs are front and center in investors’ minds. Trump’s main objectives of tariffs are to collect revenues for the government, protect specific industries, and curtail the flow of illegal drugs into the US. But there are headwinds, the biggest of which is inflation. A restriction in global trade could send ripples through complex supply chains, resulting in higher prices.

Inflation: Will It Create Waves?

The Federal Reserve is already planning to pause rate cuts in 2025, and January’s hot CPI increased the probability of this happening. The dot plot now suggests one rate cut in 2025, which, according to the CME FedWatch Tool, is pushed out until the July Fed meeting, as of this writing.

A rise in inflation would mean the Fed would be more cautious with interest rate cuts. Tariffs and an expansion of the federal deficit could impact the interest rate cut path. A good chart to monitor inflation is the chart of the ProShares Inflation Expectations ETF/iShares TIPS Bond ETF (RINF:TIP), which approximates the market’s inflation expectations.

FIGURE 2. THE STOCK MARKET’S INFLATION EXPECTATIONS. Inflation expectations seem to be lowered after the market shrugged off recent inflation reports and tariff news.Chart source: StockCharts.com. For educational purposes.

Inflation expectations aren’t as low as they were in September 2024 but are below the January highs.

Why impose tariffs when it upsets global trade and results in inflation? One of President Trump’s tariff objectives is that tariff revenues will offset his planned tax cuts. 

Lower Taxes and Deregulation

Trump plans to extend the 2017 Tax Cuts and Jobs Act (TCJA) provisions. He also plans to add other tax cuts — eliminating taxes on tips, overtime pay, and Social Security benefits. Lower taxes means more money for consumers and corporations. But will the tax cuts be enough to make up for the higher prices consumers will have to pay for goods?

These are just one piece of the change puzzle. Other policy changes include less oversight across different industries. Three sectors that could benefit from deregulation are Financials, Industrials, and Energy.

• Financial companies can benefit the most, especially if rules for banks, credit card companies, etc. are more relaxed. The biggest beneficiary could be the big banks.
• Dialing back on environmental regulations such as carbon emissions will benefit oil and gas companies.
• Less compliance costs would mean more productivity. As a result, the Industrials sector could see gains.

The PerfChart below compares the one-year performance of the Financial Select Sector SPDR ETF (XLF), Industrial Select Sector SPDR ETF (XLI), and Energy Select Sector SPDR ETF (XLE).

FIGURE 3. PERFCHART OF FINANCIALS, INDUSTRIALS, AND ENERGY. A deregulatory environment would benefit certain industries more than others. Financials are in the lead and are likely to benefit the most from deregulation.Chart source: StockCharts.com. For educational purposes.

The Financials are leading the pack, while the Energy sector is lagging. In a deregulatory environment, the Financials could remain in the lead.

The Bottom Line

Expect to see a boatload of news stories as the year unfolds. As a smart investor, the best way to navigate the stock market’s up and down waves is to follow the charts discussed in this article. There are many uncertainties in the market, so don’t sway your investment decisions based on what you hear in the news.

You never know what lies ahead, just like a river. But if you look at the overall trends, determine which sectors are being impacted by policy changes, and keep an eye on inflation expectations, you’ll be able to navigate steadily through the rough patches.

Disclaimer: This blog is for educational purposes only and should not be construed as financial advice. The ideas and strategies should never be used without first assessing your own personal and financial situation, or without consulting a financial professional.