The confluence of economic, geopolitical, and policy uncertainties is creating a building sense of unease amongst investors, a concern that we share. While the frequency and speed of shifts in policies coming out of Washington have been breathtaking, we continue to closely monitor the evolving landscape and take proactive steps to position client portfolios for what we believe to be building risks in the broad markets. A summary of our baseline views related to the economy and markets follows:
- Slowing Economic Momentum: Recent economic data suggests a potentially rapid deceleration in economic activity as evidenced by the Atlanta Federal Reserve measure of current economic activity.
- Expanded Valuations and Earnings Expectations: The robust equity performance of the past two years has been characterized by strong earnings growth and valuation expansion. At current levels, valuations suggest muted returns for equities going forward. Simultaneously, earnings growth expectations have been rising, creating a higher hurdle for companies to clear. This divergence between economic signals and earnings expectations warrants caution.
- Interest Rates and Inflation: While interest rates are normalizing, the trajectory of inflation remains unclear. Recent developments, including aggressive tariff policies and geopolitical tensions, add complexity to this picture.
In addition to our baseline concerns with respect to the economy and markets, recent developments suggest an increasingly unstable and uncertain environment. These include:
- Tariff Policies and Trade Uncertainty: The imposition of aggressive tariffs with stated threats of reciprocal tariffs has meaningfully negative implications for both inflation and trade.
- Geopolitical Tensions: Friday’s meeting with the President of Ukraine suggests a shift away from long established alliances, creating significant uncertainty and tensions around the world.
To quote Martin Wolf in the Financial Times “These are merely two sets of decisions in the whirlwind that has accompanied the second Trump presidency. But for the outside world, they are of huge significance. They represent the end of liberal, predictable and rules-governed trading relationships with the world’s most powerful country and also the one that created the system itself. They also represent the abandonment by the US of core alliances and commitments in favour of a closer relationship with an erstwhile enemy. Trump clearly thinks Russia more important than Europe.”
- Fiscal Rationalization: While DOGE will likely identify areas of inefficiency in government, it would be naïve to downplay the importance of fiscal stimulus to economic growth over the last five plus years. The economies’ ability to sustain growth in the face of fiscal restraint is unknown.
- Policy Volatility: The rapid pace of changes and reversals in trade, fiscal, and foreign policy creates significant uncertainty for businesses. Long term capital allocation decisions are typically made when there is visibility into the “rules of the road.” The speed and magnitude of policy shifts coming out of Washington is likely to cause businesses to pause spending pending greater policy clarity.
Our Portfolio Strategy:
In response to these challenges, new and old, we have been positioning portfolios broadly with the following attributes:
- Equities:
- We continue to manage equity allocations below long-term targets with an emphasis on quality and stability given our view of rising risks in equity markets.
- We continue to maintain a bias toward U.S. markets given our assessment of long-term fundamentals and valuation.
- Fixed Income:
- We are prioritizing high-quality, short- and intermediate-term securities.
- Given the uncertainty surrounding inflation and the lack of adequate compensation for credit or maturity risk, we are being cautious with respect to credit in our fixed-income positioning.
- Alternatives:
- We remain positive on gold as a valuable diversifier and hedge against macroeconomic uncertainty.
- We see potential in private investments to enhance returns and reduce risk, with a focus on managers with unique strategies, strong track records, and a commitment to capital distribution.
Our Commitment to You:
We have long positioned portfolios to be resilient in the face of volatility with an emphasis on protecting capital in an increasingly risky world. Importantly, while a short sample period, our client portfolios have been protecting capital and performing in line with our expectations during this recent period of market volatility.
We understand that periods of market turbulence can be unsettling. However, we are committed to proactively managing your portfolios. We will continue to take advantage of opportunities such as tax-loss harvesting and rebalancing into high-quality assets at more attractive valuations.
Please reach out with any questions on your portfolio. Thank you for your continued trust.
