Keeping Our Balance Amid Upheaval
What happened last week?
The S&P 500, Dow, and Nasdaq fell by -0.24%, -0.54%, and -0.53%.
The push back of 25% tariffs on imports from Mexico and Canada (10% on Canadian energy) or 30 days in exchange for help on the border with crossings and the amount of fentanyl flowing into the US provided investors with relief.
The 10% tariffs on China remained along with a measured response by China on US imports. In addition, the economy added 143K jobs in January with the unemployment rate dropping to 4.0% and wages increasing by 4.1% y/y.
What does this mean for investors?
We expect volatility to feature strongly this year, as evidenced by the decisions and statements coming from the Trump administration.
We expect less absolute volatility from credit markets and this is the reason – along with strong gains in U.S. large-cap equities the past two years – that we have elevated income as a portfolio priority in our recommended Strategic Asset Allocation where we have raised U.S. high yield debt from 2.0% to 3.2% at the expense of equities.
3 Things to Know
Diversification and Prudent Risk Management Are Keys to Navigating Volatility
New territorial claims, torn up trade treaties, federal contracts in flux: we won’t attempt to catalogue the norm-breaking disruptions of the new US administration.
Which announcements from the US President should we attempt to model into our economic outlook? Which are just opening gambits of a negotiation? It will be difficult to judge.
As our Global Investment Committee (GIC) met last week, we debated the striking trade discord, the waxing and waning of tariff threats, and retaliation. We considered all of this likely when we released our Wealth Outlook for 2025 and when we last changed our tactical asset allocation in late November, we reduced equity risk slightly.
The GIC considered reducing it further. Looking forward, we expect to weigh new trade developments against a base case economic background that is positive for an increasing number of industries.
Tariff Threats: Globally Reliant US Firms May Get the Short Stick
While shifting this burden could strengthen US production over time, it will not come without a cost, one that should be clear to many corporate shareholders. Trade aims at finding the cheapest sources of supply and the strongest sources of demand. International trade is highly profitable, and constraints on trade would harm profits.
If the tariffs announced on February 1 ultimately do come to pass, they could impact more than maple syrup from Canada and avocados from Mexico. Canada is the largest supplier of crude oil, natural gas, and electricity to the US.
Given highly integrated supply chains, the US also imports cars, trucks and parts from its northern neighbor, as well as industrial machinery and equipment, lumber and wood products, minerals and metals.
From Mexico, the US imports computers, televisions and other electronics, vehicles and parts, medical devices, agricultural products, machinery and appliances. Turning to the east, imports from China run the gambit from broadcasting equipment to computers, from machinery to parts, from home goods to plastics, and from rare earth minerals to a variety of chemicals.
We expected President Trump to increase tariffs on many Chinese import product groups and toughen other trade restrictions but to not invoke 60%+ tariffs across all imports. We also expected that a retaliatory response could follow, as well as efforts by China to shore up its trading relations with other emerging markets and Europe, too, if it faces new tariffs.
In our view, these moves should only have a limited impact on companies and sectors outside the directly affected areas.
Is Gold Destined to Shine?
We also considered the case for gold, which has rallied sharply in the face of higher real interest rates. At a record high inflation-adjusted price, we don’t view gold as a risk-free investment.
In fact, it may be a “momentum” trade. Yet in an environment of international discord, with reduced confidence in the predictability of US policy, it may be the asset class of the moment.
See our weekly CIO Strategy Bulletin for more details