The Trump administration’s revised positioning on tariffs has been extremely welcome news for markets—but we are not necessarily out of the woods.
Investors should brace themselves for further fluctuations as shockwaves from Liberation Day continue to reverberate throughout the financial system.
Expected volatility is still historically high. This signals more instability ahead.
But the flip side of volatility is opportunity. High volatility suggests stock prices are still discounted as investors around the world retreat from risk-taking.
Market environments like these tend to create favorable entry points for long-term investors who have the financial and psychological fortitude to handle the short-term turbulence.
Resilience is key
One the main reasons the Trump administration decided to pursue a tariff strategy in the first place was to improve supply chain resilience.
The idea is to make the U.S. economy stronger and less reliant on the kindness of other nations, especially rivals like China.
The 2020 pandemic revealed critical weaknesses in U.S. supply chains as shortages quickly developed in items ranging from masks to household cleaning products to pharmaceuticals.
Just as governments need to focus on being able to provide essential goods and services to their citizens in times of crisis, investors should have similar priorities when selecting the businesses they choose to own.
We actually used the word resilience in naming one of our Model Portfolio strategies (our growth-oriented American Resilience portfolio)—but the principle applies to all of them.
Investors tend to focus heavily on financial metrics—which are of course very important. But financial metrics are also backward-looking.
What matters in difficult environments is how businesses will perform going forward, not how they did when conditions were easy.
This requires careful analysis of the qualitative characteristics of businesses that will sustain good financial performance, even in difficult circumstances.
When it comes to putting money to work in volatile markets and potentially challenging economic environments, investors in stocks should seek out companies that offer the following:
Structural demand growth that is largely independent from the broader economic growth trajectory because of technological or other trends.
Asset scarcity that will give businesses pricing power in a wide range of conditions.
Sticky customer relationships that tend to prevent customers from defecting to other suppliers when excess capacity forms.
Recurring revenues with contractual support that protect company earnings in downturns.
Strong balance sheets that can prevent a temporary downturn and hit to cash flows from becoming a fatal blow.
Smart management that acts prudently but also opportunistically when the going gets tough.
Thanks to the internet, financial data has become a widely available commodity. Getting the numbers and crunching them is now the easy part.
The harder part is understanding and identifying the businesses that will survive adverse circumstances and then thrive in more favorable conditions. This is where we believe investors should focus their energies.
Volatility can be your friend
The current market environment can be likened to an earthquake. With Trump now signaling his intention to pursue a more moderate path on tariffs, we have potentially moved beyond the worst phase.
But the financial system is still feeling the aftershocks of this largely unexpected development. And fear naturally remains high among investors that we could see another big quake before market conditions settle.
Perhaps the best measure of investor anxiety is the CBOE Market Volatility Index (VIX). The VIX measures the extent to which the S&P 500 is expected to fluctuate, up or down, over the next 30 days, as inferred from options prices.
