Trump’s tarriff announcements on products (Steel) and countries (China, Canada and Mexico)[1] shook markets in February. Economic policy uncertainty shot up to levels last seen during the pandemic, and higher than any time in the last 25 years.[2]
This uncertainty hit stocks hard; In particular the magnificent 7 stock market leaders of the last two years
We will explore what this economic uncertainty might mean for your portfolio but first lets review the details of February’s selloff.
Stocks reacted poorly to Tarriff uncertainty, increasing inflation and slowing growth.
Stock sector movements were consistent with the theme of slowing earnings and economic growth.
Our Navigator framework informs our outlook.
Economy: Economic data paints a strong, if muddled, picture. Strong manufacturing new orders activity pushed GDP forecasts higher. However, throughout the month US economic reports began to come in below expectations. Additionally, recent data points to accelerating inflation. Earnings growth remains strong, but estimates have declined since the beginning of the year.
Technicals: Technical market measures also present a mixed bag. The equal-weighted S&P 500 index is outperforming the capitalization weighted index, a potentially significant change following two years of narrow stock gains. January’s “Deep Seek Crash” foreshadowed a February Mag 7 drawdown; the index has dropped into correction territory which may be a healthy indication of rotation to new leadership or may lead to further volatility.
Sentiment: Retail Investor sentiment quickly turned negative during February’s technology-driven selloff; sharp declines in this measure are considered a positive sign for short term performance. Trump’s tariff announcements led to a sharp increase in economic policy uncertainty, hurting general sentiment. Meanwhile, long-term inflation expectations hit their highest level in 30 years.
Valuation: P/E ratios have contracted sharply over the past month. The spreads of large cap vs small valuations are still at extremes. Price to cash flow multiples for international stocks remain compelling relative to US stocks. Despite a drop in February, yields available in the broad investment grade bond market provide a compelling alternative to the S&P 500 earnings yield.
Robin McCall: I think the important thing is not to make it look like we're panicking.
President Andrew Shepherd: See, and I think the important thing is actually not to BE panicking.[3]
The Navigator framework presents some conflicting information; there is a lot of uncertainty in today’s market. When this happens, there is a tendency to react in ways we may not normally react; it’s important to remind ourselves how to stay focused on what’s important – we need to not BE panicking, when our emotions tell us to.
There are two great ways to coach ourselves: First, to recognize the cognitive biases we all have and, second, to remind ourselves of our discipline – this helps us keep focused on what we can control.
Loss aversion is one of the cognitive biases we need to address. Many psychological studies illustrate that pain from a loss is worse than the equivalent good feelings we get from a gain. We must realize, however, that short-term volatility is the price we pay to achieve solid long-term returns in the stock market. The widely used chart below, from JP Morgan, illustrates the fact that, on average, the S&P 500 gives us a 14% loss sometime during the year. We’ve only had a 5% loss so far this year. Don’t overreact!
There are new and growing risks, such as tariffs, regional conflicts, a potential resurgence of inflation, and softening earnings estimates. There are also opportunities in today’s market; we position our portfolios for these risks and opportunities while anchoring in our discipline.
Our positioning reflects our long-term focus while adjusting appropriately those portfolios which have a tactical component:
After two years of narrow market performance, diversification has begun to show its value; we are positioned to benefit from this trend, anchored in our philosophy and a sound analysis of expected returns.
This material is intended to be educational in nature, and not as a recommendation of any particular strategy, approach, product or concept for any particular advisor or client. These materials are not intended as any form of substitute for individualized investment advice. The discussion is general in nature, and therefore not intended to recommend or endorse any asset class, security, or technical aspect of any security for the purpose of allowing a reader to use the approach on their own. Before participating in any investment program or making any investment, clients as well as all other readers are encouraged to consult with their own professional advisers, including investment advisers and tax advisors. OneAscent can assist in determining a suitable investment approach for a given individual, which may or may not closely resemble the strategies outlined herein.
[1] Source: Reuters All of Trump's tariffs and threatened trade actions | Reuters
[2] Source: Economic Policy Uncertainty Index
[3] Source: The American President, directed by Rob Reiner, Starring Michael Douglass, Annette Benning, Martin Sheen, Michael J Fox, and Richard Dreyfus, Universal Pictures, 1995
[4] Source: Bloomberg (4) Activity | Gillian Wolff, CFA | LinkedIn
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