This commentary was originally posted on April 8th.
Significant U.S. tariff hikes that exceeded market expectations have sparked a swift, negative reaction, pushing the U.S. equity market down almost 20% below recent highs. Investors struggling to manage their portfolios through this unpredictable market may consider cutting their stock holdings drastically, but we prefer a more surgical approach. Let’s take a closer look.
While U.S. equities have faltered with an increasing chance of recession and higher inflation, European equities have outperformed. Exports to the U.S. support only around 2% of Europe’s economy the economic outlook is more stable, and stocks are cheaper versus the U.S. In our global model that guides Northern Trust portfolio allocations, we trimmed exposure to U.S. equities and increased the allocation to developed-market stocks outside the U.S.
Despite the tariff turmoil, we still favor equities globally, including an overweight to U.S. stocks even after trimming the allocation. Markets have proven susceptible to fluid tariff polices, and we think sharp equity rallies are likely. While we trimmed exposure to high yield bonds slightly, we still favor them as they have historically helped to soften the impact of equity downturns and participated in rallies. High yield bonds have held up relatively well in this market.
To be sure, we see a better-than-even chance of recession as a soft economic landing becomes less likely. We expect the Federal Reserve to continue to cut interest rates to support economic growth, though the threat of tariff-fueled inflation could complicate the timing of Fed moves. With this high amount of economic and tariff uncertainty, we are wary of overcorrecting into a defensive position.
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