Overview
As we enter April, recent developments have meaningfully reshaped market sentiment. The bold tariff decision announced on April 2nd, combined with weakening consumer data and persistent inflationary pressures, has prompted a broad repricing of risk. While valuations were already elevated at the start of the year, these factors have underscored the need to reassess growth and inflation expectations for 2025.
Key Drivers of Change
The market is grappling with a complex set of challenges. Inflation, though slightly easing from its peak, remains sticky, continuing to pressure the consumer. The new tariff measures are shifting global trade expectations, potentially raising production costs, though their full impact on supply chains is still unclear. These uncertainties are driving market adjustments, with the markets pricing in higher costs and narrower margins.
Equities, already under pressure from elevated valuations, have seen broad-based declines. The repricing reflects more than just a reaction to tariffs – it’s a reassessment of growth expectations, particularly for companies trading at extended P/E multiples. A correction was needed to flush out some of the excess; it just happened to be sharp and fast. Credit markets have followed suit, with signs of increased risk aversion prompting a re-evaluation of risk via wider credit spreads.
Navigating Opportunities and Risks
Given these developments, now is the time to take an active stance, repositioning portfolios to capitalize on emerging opportunities. Rather than retreating to defensive positions, we are leaning into volatility and are shifting risk and reward profiles.
Equities are down 15-20% from their peaks, presenting opportunities for proactive investors. Volatility creates attractive entry points, allowing investors to capitalize on market inefficiencies. This is not the time to “ride out” fluctuations. Volatility signals change, and with change comes opportunity. Client portfolios can be repositioned into assets that can benefit as the economic landscape evolves.
Unless the growth outlook weakens considerably or unemployment gaps higher, conditions that would point to a recession, the Fed is unlikely to cut rates as it remains focused on ensuring inflation continues its downward path. That said, if uncertainty continues to rise and risk assets begin to unravel further, it’s likely that the Fed could step in preemptively with some form of policy accommodation or additional liquidity measures. In the meantime, we expect rates to trade in a range as the market digests tariff impacts and continues to grapple with ongoing growth and inflation uncertainty.
Strategy
We began 2025 with a conservative posture relative to our objectives, incorporating cash, higher quality assets, and hedging strategies to support this view. Early in the quarter, we added some additional hedges but have started to reduce them as the market has declined. Since then, we’ve been able to harvest losses and reposition our portfolios into more attractive segments of both equity and credit markets, with a continued focus on prioritizing liquidity as the market navigates volatility.
Our outlook on corporate credit is more positive than it was at the start of the year, although we continue to monitor this segment with caution as yields rise. Structured credit, in particular, presents some of the most attractive opportunities when adjusted for risk. Our conviction in income and credit has strengthened following the recent sell-off and we maintain a tilt towards credit, as we believe it offers more compelling risk-adjusted returns compared to equities, even after the sell-off.
The rally in rates has been notable following a rise in yields during the first quarter. While they reversed quickly over just a few days in April, we expect that rates are likely to remain rangebound. We view duration as an essential component of a total portfolio approach, providing income and favorable correlation benefits that can enhance diversification. We will actively adjust duration for optimal exposure.
Outlook
Despite the recent pullback, we remain cautious on equities, which are still trading above long-term average valuations. While stocks are more attractive than they were two months ago, they do not offer compelling value adjusted for risk, especially when compared to credit. We expect continued volatility in the stock market, which reinforces the importance of liquidity and active management during this correction. The income derived from credit has risen and the spread adds an increasingly attractive total return element to boot. Most importantly, liquidity provides us with flexibility to navigate volatility and seize additional opportunities as they arise.