- Initial optimism surrounding supportive economy policies from the new administration quickly faded when rhetoric around tariffs, reduced government spending, and immigration were enacted into policy.
- An elusive recession in the U.S. over the past two years was fought off by a surprisingly resilient consumer and expansive fiscal spending. The wealthiest consumers accounted for a disproportion of this spending, making a potential erosion in their confidence from a declining wealth effect especially relevant.
- Perhaps even more impactful than policy changes, the level of uncertainty has the potential to meaningfully hold back business and consumer spending. Outside of some pulled forward demand in anticipation of price increases, future spending could decline to meaningfully lower levels.
- Inflationary pressures could once again be building despite a slower growth trajectory, led by passthrough price increases and other inflationary policies including curtailed immigration which helped maintain subdued wage growth.
- Elevated equity valuations entering the year made markets particularly susceptible to disappointments in growth, profits, or some combination of the two – particularly in U.S. large-caps. While nearly all markets have declined, the S&P 500 has finally fallen behind other major international indices after an extended period of relative outperformance.
- Despite remerging concerns surrounding inflation, yields initially declined as the flight to safety playbook was dusted off. The U.S. Treasury 10-year yield dipped below 4% for the first time since October of last year before rallying back to 4.5% based on potential deleveraging and renewed inflationary pressures from tariffs.
- In-line with equities, credit spreads widened creating a headwind for high yield and leveraged loans. Relative to equity drawdowns, the fall in high yield has so far been relatively benign (at least through early April).
- Private market assets will realize some sensitivity into the dramatic repricing currently occurring in public markets. Sponsors with captive asset bases and an expansive toolkit should be able to take advantage of dislocations that, while painful in the short-term, could set the stage for compelling future performance.
- Following widespread acceptance of a soft-landing scenario and accommodative risk asset performance, markets are now faced with significant policy and growth headwinds that have the potential to trigger a recession in the coming months.
- Periods of extensive volatility and uncertainty, like we experiencing currently, are painful and scary. Rather than panic, its best to focus on productive action as dislocations tend to breed opportunity.
- There are several actions to consider into the coming months: 1) opportunistically rebalancing to take advantage of areas of market weakness 2) for taxable accounts, contemplate tax-loss-harvesting assets to either offset future gains or to tax-efficiently reposition portfolios and 3) consider opportunistically leaning into market weakness after ensuring ample medium-term liquidity is secured.
- It’s likely volatility continues into the coming months or even throughout the year, but ensuring a proper asset allocation and financial plan for the future offers the opportunity to be well situated for many years ahead.
