A lot has happened since I last wrote to you. As I write this letter Sunday night, the futures market expects the S&P 500 to sink again when the market opens Monday.

The yield on the 10-year U.S. Treasury bond — a pivotal indicator — continues to fall and provides insight into a slowdown of the U.S. economy. If yields continue to drop, a recession is likely on the table.

Let’s revisit the key takeaways from our March 24 note:

• The falling yield on the 10-year Treasury bond may signify slowing economic growth.
• April 2nd – “Liberation Day” – will be crucial for the market’s direction.
• The U.S. market may experience a double bottom. Already, the initial bottom appears to be in place, provided there is no further escalation of trade wars or economic shocks. We most likely won’t see a quick bounce back until the uncertainty surrounding tariffs, the tax package, and inflation begins to abate.
• Deploy dollars on pullbacks during the spring and summer months.
• Take a close look at technology, utilities, as well as developed and emerging markets.

What has changed since March 24?

The big change was “Liberation Day.” President Trump imposed a minimum 10% tariff on all exporters to the United States, along with additional duties on approximately 16 nations that have the largest trade imbalances with the U.S. Meanwhile, the U.S.’s two largest trading partners, Canada and Mexico, were left off the list. Their existing 25% tariffs with carve-outs will remain in place. Additionally, some goods will be exempted, including steel, aluminum, copper, pharmaceuticals, semiconductors, lumber, bullion, and energy materials that are not available in the U.S. This raises the average effective tariff in the U.S. to around 25%, up from the previous 5%.

The announced tariffs came in very high and exceed our worst expectations. In fact, the magnitude of these tariffs seems nonsensical, especially considering how poorly the tariff rollout has been handled. All else being equal, we anticipate that the effects of these tariffs could present a meaningful headwind to the U.S. economy. This could result in Gross Domestic Product (GDP) decreasing between 1.5% and 2%, and inflation increasing by at least 1%-1.5%. This development makes us less positive on U.S. risk assets for the near term. These tariffs, along with China’s retribution, mark the start of a trade war, which may push the bottom lower.

What to do now?

In times like this, I always look to my old steadfast hand, Barry Brett, who cofounded the firm. Barry flew on a naval aircrew during the Vietnam War. He always reminded me there are three things you can do during periods like this: buy, sell, or do nothing, and often doing nothing was the prudent move.

To me, it is not what you do during these times, but how you prepare for them in advance. If you recall, during our Firm Economic and Market Update this year, we presented a concerned tone, even though the markets were sitting at all-time highs. We spoke with many of you last year to see if your asset allocations or risk model had changed. If they had, we made changes to make sure that going through any correction or bear market we would not be taking the same risk as we had a few years prior.

We also know that down markets create opportunities to recognize tax losses in non-qualified accounts. This gives us an opportunity to recognize a tax loss if you dollar-cost average or put capital in at the highs of the market. Invest immediately (so as to not violate any wash sale rules), then take tax losses on paper so that they may be realized to offset future gains when the market does come back. As many of our clients know and remember, we have employed this tactic throughout previous downturns. This is a solid strategy to recognize tax losses, yet stay invested, so we will employ it again.

We have built an extremely diversified portfolio that has been taking less risk than the markets. Although every time is different, these portfolios are built to withstand market stress, such as the bursting of the dotcom bubble, 9/11, the fallout of 2001-2003, the Great Recession of 2008 – 2009, and the COVID-19 pandemic in 2020. Unfortunately, I believe the trade war has the potential to be of a similar magnitude.

Looking for Opportunities

We continue to recognize that increased volatility creates opportunistic positioning for the long term.

• Deploy dollars on pullbacks during the spring and summer months.
• Take a close look at technology, utilities, as well as developed and emerging markets.

Our team is evaluating opportunities, but proceeding cautiously, because this situation remains fluid. As investors flee risk assets in favor of safe havens, like U.S. Treasuries, they push yields lower. Meanwhile, our clients with diversified portfolios already have fixed-income investments to help mitigate the downside risk.

As always, if you have any questions or concerns, please feel free to reach out to our team.