Sometimes, you just need to sit down, take a minute, catch your breath, and organize your thoughts. Now is undoubtedly one of those times. After all, the last month has given us plenty to think about. US political developments have come fast and furious, whipsawing global markets. From our perspective, investors would be well served to focus on what they know rather than trying to predict how trade policy may ultimately settle out.

It's incredible to think that it's only been one month since April 2nd's Liberation Day when President Trump rolled out his aggressive tariff policy. Markets were shocked by the scope and magnitude of the tariff plan; at its introduction, it took the effective tariff rate to levels not seen in the last 100 years. The reaction was violent. Equities—both domestic and foreign—sold off aggressively over the next several days. Sovereign yields rose sharply after initially falling, and credit spreads widened. The dollar, after initially rising, sold off through the middle portion of the month before stabilizing at a lower level.

Over the days and weeks that followed, uncertainty rose. In response to ructions in financial markets—specifically the Treasury market—we heard policymakers try to tone down the rhetoric. However, other officials have often countered this, or at the very least, not confirmed. Despite the chaotic commentary, concrete steps were taken to delay or roll back tariffs on key trading partners. China is the notable exception.

Thus far, markets have responded well, with many major equity indices more or less at the levels at which the tariff policy was introduced (in fact, many global markets have rallied well past their level before the announcement). Treasury yields have largely round-tripped, and credit spreads are only modestly wider after a significant move post-announcement. The dollar does stand out as being materially weaker.

We're now faced with more questions than answers. Will the significant deterioration we've seen in the sentiment data start to filter through to hard data? Will labor markets continue to hold up in the US? Is the massive pull-forward in demand that we saw in the first estimate of first-quarter GDP a harbinger of weaker demand to come? How might consumers adjust to market volatility, elevated uncertainty, and potentially rising prices? On top of all of this, how will policy evolve from here? The simple fact is that there is a great deal of uncertainty, and the answer to many of these questions is that we don't know.

So, what do we know? We know that growth was slowing coming into the tariff announcement, and the policy's rollout introduces significant downside risks to the economy. We know that even after all of the market volatility, asset prices are largely unchanged. The US equity market remains expensive, and forward earnings expectations continue to look optimistic. Is there a bullish path forward? Of course, but it's a narrow path to travel. We believe that the one constant moving forward will be uncertainty, which is likely to be reflected in an increase in market volatility. Here at Manning & Napier, we continue to focus on the balance between risk and reward. As an active manager, we are committed to identifying investment opportunities no matter the environment, while simultaneously managing risk for our investors.

Our Perspective

We have been cognizant of the downside risks to the US economy for some time now. While the US economy has been on a softening trajectory, growth has remained incredibly resilient due in large part to the massive fiscal transfers undertaken in the months and years following the pandemic and elevated household net worth. With the added uncertainty from US trade policy, we see an increase in downside risks. Market expectations have been for a continuation of the strong economic growth we have seen over the last several years, and we believe this may be overly optimistic. To be clear, this does not mean we are calling for meaningful economic weakness; rather, expectations look elevated relative to reality. With the Federal Reserve having paused its cutting cycle, it remains to be seen how the economy will respond to a prolonged period of elevated rates and uncertainty. Given the varied risks we see in the market today, we are placing an emphasis on risk management.

Our View

Economic Cycle		The US economy has remained resilient despite the aggressive hiking cycle we saw from the Federal Reserve. However, growth is slowing from above-trend levels. Can the US consumer continue to remain resilient? Could policy change be disruptive, or might factors such as deregulation support investment?
Stock Market		The US stock market continues to trade near all-time highs. Earnings expectations reflect a rosy outlook. With the Fed looking more cautious on its rate cutting cycle, can earnings growth support higher prices in the potential absence of multiple expansion?
Bond Market		Risks to the economy and inflation look balanced. While elevated levels of inflation and resilient growth could push yields meaningfully higher, a sudden slowdown in growth could also see cuts priced back into the market and yields fall from their current levels. Corporate spreads remain near their lows.
Important Issues on the Radar		Trade Policy: The new Administration has rolled out an aggressive trade policy at a time when the US economy is already slowing. It’s unclear how the US and its trading partners will navigate this ordeal, and we see the policy at the very least as having injected a great deal of uncertainty into the global economy.
		AI: Booming investment in semiconductors and AI infrastructure has been a feature of markets for years now. Will the release of lower-cost models lead to a reduction in investment or could increased efficiency super-charge these efforts? How may AI begin to have a real impact on businesses and the economy?

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Sources: Bloomberg.

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