One week / one topic: Back to the future

What happened?

The steep tariff announcements of ‘Liberation day’ came and went, followed by countless escalations, threats, pauses and vague promises of deals in the making.

So, how have markets fared since?

Looking at the above, several asset classes have purportedly concluded that not much has changed since the tariff announcements…

And yet, the realized volatility of returns since that momentous day tells a different story.

While future returns are notoriously hard to estimate, toying with volatility does provide some minor relief.

Put simply, following large shocks – like the one we just witnessed as observed price volatility, but also in terms of the intent to (allegedly) revolutionize global trade – things take a while to settle down.

If that is indeed the case, investors could understandably be left with a strong sense of skepticism towards unchanged equity prices given the wild swings we’ve just been through.

Or is this perhaps further evidence that – in the era of FOMO, passive tracker funds and endless government bailouts – equity fundamentals don’t matter anymore?

With so much uncertainty still to be resolved, confused investors keep debating what’s the best roadmap to use… Correction? Recession? Something else?

But remember what Doc said…: “Roads? Where we're going, we don't need roads.”

Our observations

• Fundamentals: What are we even measuring here? Contradicting signals abound, forcing one to think carefully about which game you want to be playing in these markets.

• Price action: Following wild swings, virtually unchanged equity prices look increasingly suspicious… and potentially complacent.

• Investor beliefs: No matter how much many investors want to believe that in the end not much will change, the Trump administration will keep generating uncertainty and friction at a fast clip – despite recent market-friendly overtures to China.

So what?

As part of you wants to believe that all these news headlines are just noise, you don’t get to choose which cards you’re dealt.

As ‘gap up/gap down’ price action persists, not getting whipsawed remains top of mind – especially for those who still bear the scars from investing during the US-China trade wars of Trump’s first term.

We therefore maintain an appropriate risk allocation within portfolios with a clear preference for non-US equities, DM long maturity govies and EM local currency bonds.

In the end – as they say – after all the recent commotion, the future just ain’t what it used to be… and so we deem it appropriate to have a relatively more conservative, less US-centric risk allocation than we did a couple months ago.

Mood music: Huey Lewis & The News – The Power Of Love