Equity markets have been particularly volatile over the past few weeks with the S&P 500 Index down nearly 10% from its all-time high reached last month. We believe financial markets are coming to the reality that the Trump administration is serious about implementing tariffs, not merely using the threat of them as a negotiating tactic.
While tariffs alone may not be enough to push the United States economy into a recession, they are undoubtedly a drag on growth in the near-term. Despite some recent softer economic data, and perhaps more to come, we believe the economy remains on a strong footing. Consumer balance sheets remain solid, and the labor market remains healthy. This should allow corporate earnings to continue to grow as they have in the last two years. However, the bigger issue short-term will be policy uncertainty, with businesses holding off on investments and capital spending until more clarity is shed. We believe markets will continue to be volatile, responding to the ongoing actions and pronouncements out of Washington.
We continue to feel good about how we have structured client portfolios going into this volatility. We have extended duration in bond portfolios, finding opportunities to purchase corporate, treasury and municipal bonds at attractive yields not seen in many years. And Non – US Equities have provided positive diversification benefits to equity portfolios, with tailwinds from improving growth, fiscal expansion and strengthening currencies.
While as long-term investors we understand that volatility is the price we pay for the returns we expect to receive by investing in equities, it can be challenging in the short-term to any investor’s psyche. Historically, reacting to geopolitical events that affect the stock market by selling equities has been a bad long-term decision in managing portfolios. Studies show this seldomly works, and instead patience and discipline are rewarded. To that, we are judiciously rebalancing and tax lost harvesting in our clients’ portfolios.… And being very patient.
