Another week has gone by, and there’s been more bouncing back and forth on tariffs and counter-tariffs from the White House. It is incredibly frustrating to see policy being announced and executed in such an impulsive and erratic manner, without any semblance of an underlying strategy.
There is some contention that Scott Bessent, U.S. Secretary of the Treasury, and Stephen Miran, Chair of the U.S. Council of Economic Advisors, have a master plan to devalue the U.S. Dollar while maintaining its global reserve currency status and making U.S. allies pay for their own defense simultaneously. However, the contradictions within Trump’s own cabinet leave a lot of room for doubt that this is indeed the strategy being pursued.
Another rumor making the rounds suggests that Mark Carney spent his week in power before calling the election coordinating a global sell-off of U.S. Treasuries as a planned riposte to Trump’s initial tariff announcement on April 2nd. While this is an attractive theory, it would require a phenomenal level of coordination and influence to pull it off. If true, it would be a master class in economic chess, hitting the U.S. where it hurts: increasing the cost of financing its debt.
In the face of all this, many are claiming that the traditional rules of portfolio management must be tossed out the window. I disagree.
Many of the fundamentals of good portfolio management are still very relevant. To wit, PWL portfolios are only down this year between 2% and 7% as of April 21st[1], depending on asset mix. It’s never fun to be in the red, but given the mess going on in the U.S. right now, I think our portfolios are behaving quite well. International diversification and safe bonds are largely why they are in such relatively good shape. All clients hold international stocks in their portfolios, which are positive since January 1st, largely because European stock markets have performed well this year. Bond holdings are tempering the volatility of portfolios even further.
Markets are phenomenally resilient, as long as we have the patience to live through the end of the world from time to time. At the end of 2018, the U.S. market dropped 20% from September to December during the first trade war with China, only to recover by the end of April 2019 despite the tariffs still being in place. The frustration is that the world is always ending for a new and seemingly unprecedented reason. And it takes a new reason to make markets swing as strongly as they have. When we face problems that we’ve seen before, investors know there is a solution, so they don’t sell. It’s when we face problems that don’t seem to have a solution that markets move more dramatically. Last time it was the pandemic; this time it’s Trump.
There will be a solution to this problem, and it may take more market swings before we get there. The theory about Carney’s actions mentioned above is so compelling in part because of the ingenuity of it. It’s an economic solution that wasn’t readily apparent, but it gives us hope that there is a path forward, a way out of this mess. Human ingenuity against all expectations is what generally pulls markets out of these difficult times. Think of the massive stimulus spending during the pandemic and the speed with which vaccines were developed—both a result of ingenious responses to the crisis that no one expected but gave us hope that we would get to the other side.
So, I do hope the theory about Carney is correct because I hope he wields the necessary influence to effectively push back on foolish U.S. decision-making. But if not him, someone else will. The cause of market downturns is always obvious in the moment, but the reactions and responses are rarely expected until they arise and provide a solution to the problem. We have to be patient and trust in human ingenuity that this will eventually come. The lessons of stock market history tell us over and over that it is this human ingenuity that we are all investing in.
As always, don’t hesitate to reach out if you have any concerns or questions.
[1] Source: PWL Capital
