What We Think

A relatively calm start to the year has yielded to a string of economic policies that are now roiling markets and keeping investors on their toes. While the incoming administration threatened to launch a tariff war, many investors and decision-makers anticipated a more gradual approach.

What happened?

Large cap U.S. stocks are down 13% from late February’s peak on fears that rising tariffs will set off a wave of inflation, unemployment, and—eventually, a recession. This uncertainty has triggered significant intra-day swings as investors speculate about retaliatory measures and potential negotiations that could reduce tariffs. As the suggested tariffs are global, overseas equity markets have also seen steep declines. Fixed income markets have experienced increased volatility as well.

The chart below suggests that, directionally, the new proposed tariffs are orders-of-magnitude above what markets managed through during the first Trump administration. Even with yesterday’s “90-day pause,” note that the baseline tariff rate of 10%, which is still in effect, is more than double the trailing 50-year average.

One unknown is the counter-party response. The chart above shows only import tariffs, but we may also see export trade friction as other countries retaliate. While we hope for agreements resulting in lower tariffs, in the end we anticipate a significant increase in trade barriers.

What’s next?

Today’s consumer price index (CPI) for March came in lower than expected. If this trend continues, this may give the Federal Reserve room to cut during their next meeting in early May.

First quarter earnings begin in earnest tomorrow with many of the big bank’s announcements. Investors are more likely to be listening for hints from executives commenting on how the new policies may impact their businesses going forward.

How are we positioning?

While daily swings in the market are becoming more commonplace this year, we are looking for opportunities to add to higher quality domestic and international holdings whose valuations have become more attractive.

In addition to taking a modest step into equities, we are also adding to Treasury holdings as a way of locking in low-risk attractive yields.

Sir John Templeton famously said, “The four most dangerous words in investing are: ‘This Time is Different.’” While the impetus for market corrections and bear markets can vary cycle to cycle and, while this drawdown seems like an unforced error, as investors, it is imperative that we distinguish between the cause and the effect.

As frustrating as the cause may seem, money is made and lost during periods of market stress. In the end, the way markets react (a period of sharp downs, followed by a day or two of sharp recovery, is nearly as predictable as the rhymes of a Dr. Seuss book.

While it is impossible to know the duration of any correction, whether a recession may come, or whether we may already be in one, we lean heavily into the fact that historically maintaining an appropriate (though not cavalier) risk posture is the best, time-tested strategy for achieving compound, long-term annual returns.

As always, we encourage you to reach out to your advisor should you have any questions or thoughts on your current allocation toward risk and your near-term needs for capital. Additionally, if you find yourself with excess liquidity that you’ve been holding back, awaiting an opportunity for lower prices, these periods of volatility are typically opportune times to begin deploying such capital.

Thank you for your continued trust and confidence in FBB.

Michael Bailey, CFA
Director of Research                            

Michael Mussio, CFA, CFP®
President

Important Disclosure Information: Please remember that past performance may not be indicative of future results.  Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by FBB Capital Partners [“FBB]), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful.  Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this commentary serves as the receipt of, or as a substitute for, personalized investment advice from FBB. FBB is neither a law firm, nor a certified public accounting firm, and no portion of the commentary content should be construed as legal or accounting advice. A copy of the FBB’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request or at www.fbbcap.com.  Please Remember: If you are a FBB client, please contact FBB, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services.  Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian. Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results.  It should not be assumed that your FBB account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) performance results do not reflect the impact of taxes; (2) comparative benchmarks/indices may be more or less volatile than your FBB accounts; and, (3) a description of each comparative benchmark/index is available upon request.