Tariff Turbulence: Market Volatility Returns
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Since Inauguration Day, a flurry of policy announcements have occurred, including a series of tariff announcements. The sharp rise in policy uncertainty, combined with recent softening in business and consumer confidence, has sparked a renewed bout of stock market volatility.
Key Points:
Large cap U.S. stocks have pulled back 6% from all-time highs, which on average is seen four times a year, as investors find themselves in the thick of the policy fog, with a tug-of-war between growth worries, inflation worries and fiscal concerns.
On March 4, President Donald Trump proceeded with implementing tariffs on Canada and Mexico, further driving market volatility. We expect trade policy to remain in headlines in the near term, potentially stoking continued bouts of volatility in markets.
The U.S. is less dependent on trade relative to its largest trading partners, potentially insulating the U.S. economy from the impacts of a trade war (see page 2 of attached for details).
While tariffs could create a one-time increase in the prices, we don't expect the impact to be large enough to drive the Federal Reserve to raise interest rates. In fact, the Federal Reserve is more likely to cut interest rates should economic growth slow which would spark a strong rebound across asset classes.
The fundamental backdrop remains supportive, with corporate profits rising and the U.S. economy on strong footing. Globally, economic growth is still pointing toward expansion meanwhile global central bank policies remain easy or at least are not tightening. This provides a tailwind to earnings and margins and is supportive of asset prices - let's not lose sight of this as it provides the signal through the noise.
Legacy’s portfolios are well positioned to navigate the current bout of volatility through broad based global diversification, within and across asset classes, in addition to our tactical overweight to value stocks and fixed income.
If we equal-weight indexes by giving each constituent company the same percentage regardless of size, it becomes obvious how much a few giant US companies are changing perceptions. What comes as a surprise to many is that on an equal-weighted basis, the total return on MSCI’s index for Europe has actually outperformed its US Index since the beginning of 2023.
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