Tariffs Stir Storms, But Volatility Breeds Opportunity
President Trump’s trade policies are reshaping global markets, with tariffs acting like a wake-up call for countries reliant on U.S. trade imbalances. These policies, including a 10% baseline tariff on all imports and 145% (after escalations) on Chinese goods1, aim to boost American manufacturing but are causing uncertainty. On the surface, this favors defensive plays like gold, utilities and healthcare stocks. European stocks are at risk from tariffs and a slowing economy, as the IMF cut global growth forecasts to 2.8% for 2025 due to trade tensions.2 Chinese stocks, which have also outperformed this year, would also seem to be in danger of soft economic performance and a steep decline in US demand for Chinese goods due to tariff uncertainties. Given these realities, we believe investors should avoid the “decoupling” hype, as U.S. demand still drives global markets.
The S&P 500 is down 5.07% year-to-date through April 29th, 2025, with the Nasdaq down 6.9%.3 These decreases largely reflect tariff-driven volatility though it’s worth noting that markets rebounded on April 29 after Treasury Secretary Bessent hinted at de-escalating Chinese tariffs.4 Small-cap stocks could rally if the Federal Reserve (Fed) cuts rates in June or July 2025, spurred by weak jobs data, due out on May 2,and recent anecdotal labor shedding reports, especially with significant outflows in small-cap funds, signaling underinvestment. Gold’s 26% surge underscores risk-off sentiment, while bonds may benefit from a risk-off shift as high-yield spreads over treasuries (368 basis points)5 haven’t fully priced in recession risks. While the US and global markets have historically been a self-corrective system, where the interplay of economic behavior and valuation shift has resulted in wealth creation over the long term, investors’ behavior is most often determined by short term stamina for uncertainty. Interestingly, in this crisis we see the downside case – an existential crisis of isolationism – as being mostly known, but the case for a potential recovery, and the timing and degree of such, is the unknown. Being prepared for the worst, and positioned for the best, would therefore seem to be a reasonable strategy.
How could a positive outcome play out? While corporate moves, like increased capital spending or trade deal surprises (e.g., India or Japan deals expected soon), could spark rallies, we still expect a +/-3% trading range due to headlines and Truth Social post risks. Companies like General Motors, Procter & Gamble, and Coke have withdrawn 2025 guidance amid tariff uncertainty,6 highlighting risks for staples and exporters. This has understandably dropped earnings forecasts for the year ahead, but these actions also make a more compelling case for the Fed to ease policy as those realities will affect labor, inflation, and GDP data. For contrarians or speculative investors, small caps, with 40% domestic revenue7 and less exposed to tariffs, are poised for upside capture if Fed dovishness or fiscal stimulus emerges. Small caps could be the early compelling play for those that are able to take some short-term volatility until the June Fed meeting where there is currently a 60% probability of an ease.8
Summary: Embrace volatility don’t simply endure it:
We have been reading a good deal about strategy of late recommending investors endure the recent uncertainty and volatility, reinforcing the idea that long term returns always favor sticking to the asset allocation plan. We think recommendations to comply with asset allocations when portfolio declines and increases in volatility are in the three standard deviations of shift can seem tone deaf and insensitive. It’s not that we espouse selling in the middle of a downdraft, but we tend to wonder if the recent changes to the investment environment, that are affecting volatility since the pandemic, may be more structural and not as cyclical as many strategists have been stating. The post-COVID supply chain shifts and geopolitical fragmentation we have seen over the past five years create ripples that do not look to be transitory in nature.
Rather than be stoic, we believe investors should be looking to incorporate approaches and strategies that can create alpha from greater ranges of elevated volatility and defend more frequent equity declines. We see this approach as adding value to portfolios to improve returns, as well as add resiliency; not simply tactically but as a new strategic tool.
Why Easterly Hedged Equity Fund (JDIEX) in Volatile Markets
The wide volatility range we expect to see, driven by tariffs, Fed policy shifts, and fiscal policy, we believe favors funds like JDIEX, which aims to balance upside capture and over defend downside risk. The fund’s straightforward equity index exposure, combined with its disciplined systematic defensive options overlay, helps to provide a non-fixed income way of diversifying portfolio risk. Further, its active approach seeks to capture gains from equity rallies while protecting against dips (whatever the cause).
Sources
1 CFA Institute Enterprising Investor, How Tariffs and Geopolitics Are Shaping the 2025 Global Economic Outlook,14 Apr 2025.
2 Reuters, IMF cuts growth forecasts for most countries in wake of century-high US tariffs 22 Apr 2025.
3 Bloomberg Data
4 Source: Reuters, S&P 500 hits lowest close in almost a year as hopes wane for tariff concessions, 8 Apr 2025.
5 Bloomberg Data
6 CNBC and Bloomberg Data
7 Bloomberg Data, FactSet, S&P Global
8 Bloomberg Data
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