We recently communicated our concerns with respect to broad economic, geopolitical and policy uncertainties that we believe have elevated risk in financial markets. Today’s market reaction to the Liberation Day tariff proposals supports our positioning of client portfolios with respect to these concerns. While expectations leading into President Trump’s tariff announcement fell within a broad range, yesterday’s proposals are close to worst case scenarios. Markets are falling sharply today with the S&P 500 currently ~11% off the February high. Given the potential for continued market volatility, it is important to revisit our baseline views related to the economy and markets articulated a few weeks ago:
- 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: The potential for a global trade war likely increases already heightened geopolitical tensions broadly.
While our views remain consistent with the above points, yesterday’s announcement adds significant weight to the last two bullet points as they impact the economy. Our partners at BCA Research have made the point that economic recessions generally result from a weakening economy facing an exogenous shock. Aggressive tariff policies, the extent of which we haven’t seen since the 1930’s, would seemingly qualify as an exogenous shock. While economists will debate the probability of recession, our primary takeaways, slowing growth and higher inflation, support our baseline views and portfolio positioning. This includes the following positions with respect to broad asset classes:
- 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.
We have been positioning portfolios with a focus on resiliency and capital preservation for what we have anticipated to be a more challenging market environment. As such, we remain pleased with the performance of client portfolios.
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.
