Staying focused through tariff uncertainty and market jitters

Last week brought investors another bout of policy uncertainty and market jitters. Not surprisingly, the US stock market had a significant sell-off last week, with Friday’s action violently dragging down US stocks — especially tech stocks.¹ However, while we’re seeing headwinds in the US, we’re getting some good news in other parts of the world. In times like these, it’s critical for investors to focus on their time horizon before reacting to short-term market reactions. Here’s what we know and what I’m watching.

What drove markets last week?

Last week saw some bad news for US stocks:

• US core personal consumption expenditures (PCE), the Federal Reserve’s (Fed) preferred gauge of inflation, rose 0.4% month-over-month and 2.8% year-over-year.² This was slightly higher than expected and added to concerns about a potential resurgence in inflation.
• According to the most recent Conference Board survey,³ US consumer confidence fell to 92.9 in March, well below February’s reading of 100.1; this was the lowest level in more than four years. Even worse, the consumer expectations sub-index fell to 65.2 from 74.8 in February; this is a 12-year low. It is also worth noting that the critical level that usually signals a recession ahead is below 80, so this reading is concerning.
• The final results of the University of Michigan Survey of Consumers for March were worse than the preliminary reading.⁴ The key takeaway is that US consumer sentiment continues to decline. It fell to 57.0, a significant drop from February and the lowest level since November 2022. The expectations sub-index fell to 52.6. What’s more, expectations for inflation are on a dramatic upward slope. One-year consumer inflation expectations rose to 5.0%. Five-year expectations rose to 4.1% — their highest level since February 1993. This indicates that longer-term inflation expectations are not very well anchored (despite Fed Chair Jay Powell’s assertion at the last Federal Open Market Committee press conference that they are) — and also suggests the risk of stagflation has materially increased.
• More tariffs were announced by the Trump administration last week, most notably 25% tariffs on automobiles and certain auto parts manufactured outside the United States. This is set to take effect on April 2.
• And “Liberation Day,” April 2, is fast upon us. That’s when the US is expected to impose more tariffs on imported goods — but it’s still not clear how broad and deep that will be. That of course is causing even more market jitters, as the stock market hates uncertainty. I will note that some economists expect tariffs to reach 1940s levels in the coming months.

Focusing on the long term

In the last 8-10 weeks, I’ve been getting the same question from investors, “Should I change my allocation?” My answer is always the same: For those who have a long time horizon and are well diversified across and within the three major asset classes (stocks, fixed income, and alternatives), I would typically favor staying the course.

I know that can be easier said than done. The headlines and the market movements can be very unsettling for investors. So let me provide some perspective. This week, we’re celebrating my mother’s 90^th birthday, and I think it’s fitting that it’s happening in the midst of uncertainty and market volatility. She was born in 1935, in the midst of the Great Depression, when Franklin Delano Roosevelt was president of the United States. In the month she was born, the unemployment rate in the US was 17.54%.⁵ She lived through World War II, 1940s-level tariffs, the Cuban Missile Crisis, the assassination of President John F. Kennedy, the Vietnam War, Watergate, stagflation, the 1970s stock market stagnation, the end of the Cold War, 9/11, the Global Financial Crisis, and so much more. Uncertainty has been one of the certainties of her lifetime — along with the decades-long advance of the stock market,⁶ despite all this tumult and change. There have been sell-offs — some very dramatic — along the way, but stocks have had a way of moving higher over the longer term.

Global good news

Even now, while we’re seeing headwinds in the US, we’re getting some good news in other parts of the world. For example, eurozone manufacturing activity appears poised to improve, as indicated in the most recent Purchasing Managers’ Index (PMI) survey, which showed manufacturing PMI rose to 48.7 — the eurozone’s highest level in 26 months.⁷

As I’ve said before, there is a seismic change occurring in Europe, with a very significant increase in fiscal spending, particularly around defense spending. It’s not just Germany — France recently announced a material increase in defense spending as well — and I’m sure there will be more to come. This should bode well for the European economy in general and its manufacturing sector in particular. I expect to see “green shoots,” signs that the economy is improving, in the coming months thanks to the ramp-up in fiscal spending.

Looking ahead and staying focused

This will be a very important week given the potential for a significant increase in tariffs on April 2. This is already causing a lot of market trepidation. In addition, we will get monthly jobs reports for both the US and Canada on Friday as well as some Consumer Price Index and PMI readings. We’ll also hear from the Reserve Bank of Australia, which is making its monetary policy decision early this week.

And so, getting back to the question I’ve gotten so often in recent weeks — “Should I change my allocation?” — I usually follow up with questions of my own: Is your time horizon longer than a presidential term? Is it longer than a recession? Is it longer than a decade? That’s because if one has a long enough time horizon (and it doesn’t need to be nearly as long as my mom’s), one can maintain allocations to equities and other more volatile asset classes, especially if a portfolio is well diversified and has exposure to lower-correlating asset classes that can help smooth volatility. This is important to keep in mind given the potential for more tariffs this week – and more market jitters and understandable urges to abandon stocks. Buckle your seat belts, stay calm and carry on. And happy birthday, Mom!