After the Trump Administration announced its tariff plans on April 2, volatility has disturbed the markets, causing some investors to question their portfolios. It is easy to get overwhelmed by the down arrows, the figures in red, the dipping charts, and the negative numbers, believing this is a market low like never before.
However, discerning investors separate clamor from current reality, maintain their hope and confidence, accept what they can and cannot control, and trust that they have a well-positioned portfolio that will continue to propel them toward their goals.
Today, we address tariff-induced market volatility, our clients’ portfolios, and why the masses can be misleading.
Three Things to Know About Tariff-Induced Volatility
1. Volatility has been widely felt, but this is healthier than a bubble burst
Volatility has set in at a quick and dominant pace, but it has done so across markets. Contrast this with a “bubble burst” scenario, when a concentration in a market segment “pops,” potentially causing unforeseen chaos in a portion of the market.
What we’re seeing now – uniform downside – may feel all-encompassing, but it is healthier than a busted overconcentration in one part of the market.
2. Our investment platform has seen cycles like this before
Investors may think this volatility is much more severe than anything we’ve seen before, but there are numerous examples of similar market cycles over the last 12 years. Consider:
- The 2013 European debt crisis and the near implosion of the Japanese stock market
- The 2014-2016 earnings recession, with a nearly 0.1% growth in aggregate earnings
- The 2018 notable decline in the technology markets
- The 2020 Covid downturn
- The 2022 bear market
Our team has managed portfolios through these cycles and provided tangible value to our clients despite the circumstances.
The current tariff-induced volatility may feel alarming, but it is not novel. Rather, it is a part of a normal market cycle where short-term volatility can pay off for long-term equity market participants invested across U.S. and international markets.
3. Volatility in the indices (like the S&P 500) is not the volatility our clients are experiencing in Credent-invested portfolios.
As discussed in our recent article on “4 Ways to Respond to Tariffs & Stock Market Volatility,” investors need to be aware of bias in stock market reporting. As the media flashes negative numbers showing how the different indices fared on a given day, don’t assume this represents the rate of return across your portfolios.
Indices are often heavily concentrated within the stocks of their largest companies. Take the S&P 500, where the top 10 names make up 30% of index market capitalization. Right now, those names are experiencing a lot of downside volatility, making the overall index look worse for wear.
At Credent, we take a more equal-weighted approach throughout our portfolios, so our clients are often not exposed to the same high-level volatility reported on the news.
How We Are Managing Client Portfolios
At Credent, we prioritize risk management, tax efficiency, and a long-term approach. As such, when volatility occurs, our Investment Management team thrives. They understand how to be proactive, maintain an objective, data-driven approach, and find opportunities amidst negative sentiment.
Here are a few notes about our overall portfolio investment in the current season of volatility.
- We came into this volatile environment underweight in mid-cap and small-cap stocks. As such, we didn’t participate as much in the recent downside of these segments.
- With our FLEX strategy, we thoughtfully shifted some money away from the equity market to purchase Treasury Bills and help manage risk. Because of this, we were less affected by the downside volatility that happened on Friday and over the weekend.
- We are using the current conditions to engage with tax-loss harvesting, which can help offset future tax gains for some clients without pulling them out of the market.
Overall, risk management and opportunity-driven techniques and tactics deployed by a team of levelheaded experts can help you succeed despite volatility.
The Masses can be Misleading
It’s been our motto of the last few months: the economy and capital markets (bonds, stocks, commodities) never truly react in a way the masses expect them to.
If everyone agrees something will happen in the market or economy (like a recession or market direction), we likely won’t see those expectations play out.
Recall two examples:
- Most experts thought international markets would falter this year, but they’ve outpaced U.S. markets by 10%.
- In late March 2020, people assumed the overall market downside would end up worse than the 35-40% peak-to-trough experience. Instead, the market recovered almost immediately.
Attempting to time the market or gauge what will happen based on what the masses expect is not a wise investing tactic and, in today’s environment, could cause you to miss the potential upside that may transpire over the next 6-12 months.
What’s a better approach?
- Stick to your financial plan
- Allow risk management processes to do what they do best
- Work with a team that will navigate volatility while preparing for an eventual recovery
If you have questions about the tariff-induced market volatility or your portfolio, reach out to our experts using the form below.