Markets Want Clarity Not A (Trade) War

Will “Liberation Day” bring an end to investor uncertainty?

Erratic tariff policies have unsettled investors in recent weeks, with shifting signals on timing, scope, and exemptions. The lack of clarity on affected nations and sectors has left markets in limbo. Some reports suggest industry-specific tariffs, such as on semiconductors, might be deferred – but nothing is certain.

If tariffs are implemented in a targeted, rules-based way, investors may finally gain a clearer sense of direction. Markets can adjust to protectionism, but not to chaos. A structured trade framework would be a step toward restoring confidence. However, investors shouldn’t get overly excited. We’re not too optimistic in this administration’s ability to set and follow its own rules and the roll out of these tariffs will likely take some time.

How are consumers handling trade uncertainty?

Simply driving by the local car dealership, consumers are starting to see (and feel) the real-world impacts of the Trump administration’s tariff policies. But is it in the data? Only in the soft data for now. High-frequency indicators – especially consumer expectation surveys – tend to bounce around from month to month. In that context, the bar is high for a data-driven case linking the recent decline in consumer confidence or the rise in inflation expectations directly to tariff policy. Still, current trends may be starting to clear that bar.

One reason the impact hasn’t shown up in hard data may be that the most affluent consumers – the cohort driving the lion’s share of spending – remain unfazed. Last month’s consumer sentiment decline was broad-based, except for households earning more than $125K annually.

What could change that? Equity market volatility is a key pressure point. If investment portfolios come under pressure or job security feels less certain, high-income consumers could start pulling back. But until that happens, trade-related drags on consumption are likely to remain limited.

Portfolio strategy

Trump has said “no pain, no gain” when it comes to his tariff policy. What are the potential gains? More favorable trading terms, a narrower trade deficit, and greater leverage in negotiations. The question for investors is how far he’s willing to go to get them. Markets should take his warning at face value – some pain may be part of the plan, and tariffs could dampen investor sentiment if they start to drag on economic growth and corporate earnings. We wouldn’t anticipate a “Trump put”, or a ”Fed put” for that matter, until U.S. equity markets are down 20%, marking the beginning of a bear market and the point at which equity market volatility clearly impacts business and consumer decisions.

It bears repeating our conviction that despite the disruptive nature of recent announcements, there are some clear through-lines to investor action. Global megatrends toward re-organizing supply chains, competing over AI inputs, and seeking energy independence are happening regardless of U.S. policy. Uncertainty has accelerated these trends, but rolling back uncertainty won’t reduce their importance. And so, though it can be tempting to avoid taking action amid volatility, we believe that avoiding these developments may result in missing the boat on major economic transitions.

Where can investors take shelter while also positioning for success?

Build a more resilient equity portfolio.

• Use equity market volatility to seriously focus on quality names.
• We strongly prefer large caps for their stability. We don’t expect small caps to durably outperform unless growth is reaccelerating or unless interest rates fall while growth is still strong. Neither of these is in our base case.
• Reduce underweights to international equity. Europe has been the focus of recent investor interest, but the rally has been broad-based across regions.

Add volatility-aware and inflation-aware asset classes

• Real assets may offer the most resilience.
• Commodities and materials m ay provide ballast against inflation surprises.
• Consider geopolitical hedges such as gold, oil, and crypto.
• Examine ways to stabilize returns, such as through dividend harvesting. Since the dividend-yielding powerhouses are also very high-quality names, this is another way to point a portfolio toward quality.

Deploy equity-like risk in credit.

• In an environment where we expect low-single-digit returns from the U.S. equity market, credit becomes a highly compelling option.
• Despite recent market volatility, we have very little concern about companies meeting their credit obligations over the next 2-3 years. Even if spreads widen amid stronger growth risks, a “buy and hold” short duration strategy may create valuable income for investors.
• We particularly like U.S. high yield. We’re also constructive on convertible bonds in line with our expectations for moderate market yields.

In private assets, we strongly favor the lower middle market

• Capital flows have been concentrated in the large & mega fund space, but there are limited companies to meet the large and mega criteria. As a result, competition is increasing and covenants are deteriorating.
• The lower middle market has a larger quantity of available opportunities and more sincere diversification opportunities.
• In credit, the lower middle market also provides relative stability and stronger covenants. This is counterintuitive for many investors who see size as a strength. We are more focused on quality and lower leverage.