Equity markets were generally lower in March with the United States leading the decline. Both large and smaller company stocks declined as policy uncertainty climbed. Outside the US, stocks fared better as the dollar weakened and investors began reallocating abroad.
In the fixed income markets, treasuries rallied as investors sought more safe haven assets. Outside treasuries, bonds were generally lower as credit spreads increased from historically low levels. In our view, this is reflective of a decreased risk appetite and increased prospects for some kind of economic slowdown.
Economic uncertainty stems from policy uncertainty in the US. The topic most in the headlines and on the minds of business leaders was, and is, global trade. The prospect of new and escalating tariffs became more of a reality recently as the Trump administration finally revealed more specifics.
Those specifics were more aggressive than even the most pessimistic forecasts had predicted, and markets have reacted negatively. Economic theory suggests tariffs lead to an inefficient allocation of resources at a national level, incrementally higher prices for consumers and businesses, and leave both nations worse off. The practical reality may be a bit different from theory, as the world is more complex and adaptable than an economic model, but no one knows how different.
Trade policy can have numerous objectives, the most obvious being the balancing of trade between two countries, but there are others. The proposed tariffs appear to be a starting point and subject to change in either direction, based on how countries respond and negotiate both trade and non-trade related issues. We don’t think anyone knows how exactly this trade policy is going to play out economically or whether this will achieve non-economic objectives that make the policy worth it.
For now, the administration does not appear to be overly concerned about the market reaction. Talking points have emphasized prioritizing Main Street over Wall Street and they have admitted there may be some “short-term pain”, but there is no clear definition of what that means or what the administration’s pain threshold might be.
Another question is how their actions may influence the Federal Reserve and the setting of monetary policy. On the one hand, tariffs may raise prices, while on the other they could slow growth or cause a recession. We are not sure the Fed itself knows how it plans to react, but we know the administration would like lower interest rates, both for the economy and the government itself as borrowing costs are a meaningful contributor to the budget deficit. Looking ahead a few months, we think it is possible that Fed independence gets tested.
The crystal ball is unusually cloudy these days. When uncertainty goes up, markets tend to fall. How investors react during uncertain times tends to dictate longer-term success or failure. We think over the long-run markets and the US economy have tended to work. Introducing market timing decisions requires an investor to make two correct decisions, when to get out and back in, in the face of high uncertainty. From a behavioral perspective, getting the exit right might make it even more difficult to get the entry right, as waiting for more certainty and a rosier outlook tends to correspond with already higher prices. We have found that having one’s lifestyle needs accounted for and a strategy one can stick with over a variety of short-terms, good or bad, allows for more consistent participation in the longer-term.