Investment Perspectives Amid the Uncertainty

Kristen Nelson:

Since the start of the year, uncertainty around the new administration's tariff policy has weighed heavily on the US stock market. Yesterday the president announced his plans for tariffs. I'm Kristen Nelson, Managing Director with Bernstein Private Wealth Management, and I'm joined by Matt Palazzolo, a Senior Investment Strategist to provide real-time updates on the developments out of Washington and the impacts on the global markets. Thanks for joining us, Matt.

Matt Palazzolo:

It's good to be with you.

Kristen Nelson:

So tell us, what did we find out yesterday?

Matt Palazzolo:

Yeah, so we got to a milestone certainly yesterday, but we don't quite have the clarity and the visibility that the markets or the economy would like to have. Just to give you a sense for what the president announced, there's now a 10% universal tariff rate across the board, plus incremental tariffs above that 10% for dozens of our trading partners. So where we stand, we came into 2025 in the United States with something like an effective tariff rate of 3% across the board. We're now in the mid 20% range. So it's a pretty significant adjustment that the president discussed. This announcement was much higher than Wall Street expectations coming into it. Roughly double what many on Wall Street had expected, and as you would expect then financial markets are responding. It's early on the next day, but the s and p 500 is trading down something like three to 4%. Bonds are rallying. So interest rates have come down about 10 basis points and inflation expectations, given the assumption that these tariffs ultimately do find themselves into price increases across the board, inflation expectations for the next 12 months have moved up roughly a quarter of a percentage point. So all of this is to say that it was a big surprise, it was a big announcement, and markets are adjusting.

Kristen Nelson:

Okay, so as of Thursday morning, that's what we know. What don't we know yet?

Matt Palazzolo:

Well, we don't know yet how the trading partners are going to respond. What's their reaction? Does this ultimately end up being a beginning point for negotiations? The assumption is that yes, it does, but we don't know where those negotiations will ultimately land. And so I think that's still in terms of an important point for all of us to understand as investors is we still do have uncertainty. As I mentioned earlier, we've reached a milestone, but we don't yet know what the ultimate tariff rate will be. And so markets are still taking that into consideration and working through some unclear numbers in their models.

Kristen Nelson:

Okay, so let's assume that our trading partners aren't able to negotiate any reductions. What is the impact on the economy?

Matt Palazzolo:

Well, broad strokes, we and the rest of the street are assuming that this ends up being a headwind to growth and would push up prices. So think about having an inflationary impact. Rough numbers, and again, in all likelihood, or the assumption is that these tariff rates ultimately do come down from what was announced yesterday, but over a full 12 month period of time, growth expectations may very well across Wall Street come down by one percentage point on GDP level, and inflation expectations might move up for the next 12 months, roughly two percentage points. So it's not insignificant from our perspective. This puts the Federal Reserve in a bind. Remember, they have a dual mandate, so they're thinking about the growth side of the equation, IE, the labor market, and they're thinking about prices and inflation, and both of those are moving in the wrong direction if we in the rest of the street are correct in assuming the impact that I just mentioned, assuming that the longer term inflation expectations remain anchored and the Fed looks really closely at five-year expectations for inflation and 10 year expectations for inflation, let's assume those don't move and they stay around two and a half to 3% and only the next 12 months expectations move higher.

If the economy does slow, well then they're going to be more inclined to pull the lever on fed funds and cut rates. We were assuming something like three cuts in 2025 that may move to four, and they may move earlier and they certainly will move earlier if the labor market starts to weaken substantially.

Kristen Nelson:

Sure. Matt, you're in regular contact with our portfolio managers. How are they navigating this environment?

Matt Palazzolo:

Well, I would say that they're not doing anything different than what they previously have done. And I say that with the main point that we're always focused on high quality companies, either high quality equities, high quality fixed income. So they're looking for companies on the stock side that have good revenue visibility, that don't have stretched balance sheets that can pull the lever and manage their cost structure well to drive incremental earnings growth. So all of that is the same in 2025. On top of that, given the uncertainties, particularly around tariffs, I think it's important to note that our portfolio management teams and analysts are really engaging with management more than they ever did before. They want to understand whether or not the businesses that we own or are thinking about owning have the ability to flex, to adjust their supply chains, to navigate through this period of time to adjust their cost structure given the uncertainties.

And so that engagement is happening more and more. We want to ensure we're owning businesses that have differentiated product lines because if they have to raise prices, we want to ensure that those companies are going to retain the amount of revenues that they would expect and that there's not trade down to other products or other areas. So I think that the philosophy that we've always had on the equity side continues to be the case. If there are outsized moves, any stocks that we own or maybe we're thinking about owning or we're uncomfortable with the price, we'll take advantage. We'll step in to buy companies that maybe are being disproportionately punished and take advantage on behalf of our investors. On the fixed income side, it's been a good year so far. Interest rates have come down. They would expect that interest rates would continue to come down, the yields that were on offer at the beginning of the year that has been locked in and prices have moved up. You're getting that dual benefit of good income. And then also on top of that price appreciation. All this is to say we have a good core philosophy always to focus on high quality businesses on both sides of the ledger equities and fixed income. And that's all the more important today, given the uncertainties. And if there are opportunities to step in to pick up great companies amid the UN uncertainty, given the fact that we're long-term investors, we're not investing for the next couple of weeks, we'll absolutely do

Kristen Nelson:

So. Excellent. Thanks for that backdrop. Can you talk to me about how we're advising clients on making sure they're in the appropriate asset allocation for this environment?

Matt Palazzolo:

Yeah, diversification really is the key. We always talk about diversification. We never want to just own what's done particularly well over the last year or couple of years. This year is a great example of that. The US stock market for several years has done really, really well, head and shoulders above the non-US stock markets and other major asset classes. The US stock market is down. Forget about the announcement that the US stock market is down coming into yesterday, whereas the non-US stock market is up and not a small amount, a meaningful amount of return so far in non-US equities, bonds have done well. Private markets alternatives have done well. So the benefit of diversification really has shown so far this year, and I would expect that that would continue to be the case for the balance of the year and going forward. And that's really the advice that we've been providing. Don't chase the recent winners, ensure that we've got diversification. Let's own what's been out of favor and let's own things that are not going to work in tight correlation with one another. And that's been really helpful to smooth the ride so far this year. And again, I think that's going to be the case for the foreseeable future.

Kristen Nelson:

Thanks, Matt. I think that about covers it for today. I'm sure we'll be back together soon.

Matt Palazzolo:

Absolutely.

Kristen Nelson:

And we'll continue to provide you with timely updates as our view evolves. But of course, never hesitate to reach out to your wealth advisor with any questions. Thanks for joining us today.