Markets Rerated Change
Investors adjusted expectations in February, as they attempted to decipher how tariffs, government austerity, and unresolved regional wars affect their investments and portfolios. As a result, market interest rates and equity prices declined based on how investors think those broader themes change future investment returns This year started differently than most in US equity markets. Specifically, US stocks have underperformed foreign stocks. Foreign stocks have offered investors favorable returns over two-months, while US stocks align closer to breakeven with beginning year levels. This early-stage performance gap between the two markets seems informative and meaningful for several reasons. For one, relatively high US stock market valuations may have pushed investors away to other places, like foreign stocks or fixed income. Secondly, fiscal policies aimed at government budget cuts, while the Federal Reserve retains strict monetary policies, increase economic concerns. Diversified investment portfolios receive returns based on risks they cannot diversify away. This is what investors call systematic portfolio risk. Geopolitics contributes to systematic portfolio risks, and the current geopolitical environment seems heightened due to trade tariffs, government austerity, and unresolved regional wars. Specifically, tariffs can produce economic challenges through increased global prices, lost consumer surplus, and business contractions in export-driven markets. However, policies favoring US tariffs may represent a broader plan to reduce generationally large trade deficit and dependency on foreign credit, which finances trade deficits. In the long term, trade tariffs could strengthen the US’s competitive and economic position as it deleverages from the rest of the world.
