Headlines are busy with the announcement of President Trump’s new package of tariffs. The administration’s aim to use tariffs to help bring manufacturing back to the U.S. and addressing what the president views as trade imbalances between the U.S. and the rest of the world is clearly impacting financial markets here in the shorter term.
One fact appears clear regarding much of this – the lingering uncertainty remains one of the bigger risks from a psychological perspective. Are these reciprocal tariffs a starting point for additional negotiations? Are they really meant to be long-term in nature? How does this damage the overall relationship between the U.S. and the rest of the world on a more intermediate to longer-term basis? For now, unemployment remains low, personal income is growing at a solid pace, household debt service remains manageable, and credit conditions are broadly favorable – all of which support aggregate demand; however, the surprise of the new tariff structure has left many grappling with what it means long term for business and consumers alike.
The size and rapidity of the recent announcements prevent companies and consumers alike from making major spending and investment decisions. The longer this persists, the higher the probability of a protracted growth slowdown or recession, possibly accompanied by higher inflation. In other words: a stagflationary environment. The market has now begun to factor in further interest rate cuts this year related to a potential growth slowdown, while inflation expectations increasing may put the Fed in a challenging position. The initial market reaction has made clear that under the current policy, growth prospects have likely diminished, and inflation may resume an upward track here in the shorter term, while the overall long-term goal remains unclear.
The Importance of Diversification
The next few months will certainly prove vital for the potential range of outcomes for financial markets. U.S. stocks are down from their highs. International stocks are also down from their highs but much less so, while bond yields have declined, and prices increased as investors flock to safety. Both the initial responses and the market activity through the last few months highlight the importance of diversification that we’ve emphasized through the years. Bonds and international stocks, which still generally outweigh U.S. Large Cap stocks across client portfolios, are certainly providing some support for a weaker U.S. stock environment. We published a blog in March discussing some of the core principles of how we construct diversified portfolios with a long-term focus which you may find helpful.
JNBA Portfolio Strategies
Earlier this year, and amidst this dynamic environment, the JNBA Investment Committee made some targeted asset class weighting changes across the various portfolio strategies. In January, we reduced equity exposure relative to our base/neutral targets. The proceeds mostly went into fixed income and short-term U.S. Treasury Bills in an effort to counterbalance further downside equity volatility while earning 3-4+% interest along the way. More information about the strategy shift can be found here.
As your advocate, JNBA continues to monitor the market environment diligently and is committed to keeping you informed. We encourage you to reach out to your JNBA Advisory Team with any questions.
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 blog serves as the receipt of, or as a substitute for, personalized investment advice from JNBA Financial Advisors, LLC.
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