on 04/07/25

Dear Clients,

Amid the recent market volatility, we wanted to share our thoughts and outlook regarding tariffs and the markets.

Tariffs

Over the past several months, we have counseled two things to anyone who has asked about our approach to 2025: expect higher levels of uncertainty/volatility AND stay humble.

First, investors should expect higher levels of policy uncertainty and market volatility. This should not be a surprise to anyone that lived through Trump’s first term and it is a reality that investors are beginning to accept.

Secondly, we have counseled (and continue to counsel) humility when thinking about tariffs. Many prognosticators were incorrect about the impact of tariffs when they were applied during Trump’s first term (and Biden ended up keeping them in place). Of course, market pundits and partisan economists are currently opining on the impact of these new tariffs, but the reality is that nobody knows what will happen to the economy or markets. The US has not engaged in this level of protectionism in over a century, so we remain humble about our own outlook and skeptical of anyone more confident.

It is fair to say that there is a consensus that the recently announced tariffs were poorly designed, even among those who agree that tariffs should be used at this juncture. I will not get into the nitty gritty here, but this recent episode of Odd Lots outlines the main issues.

For those wondering about what the future holds, we have just a few thoughts. There has been conflicting information from both Trump and his admin about whether the latest round of tariffs is up for negotiation or not. Some countries may choose to negotiate and others are reciprocating with their own tariffs which could lead to further escalation on both sides, although we would point out that escalation doesn’t matter beyond a certain point (because trade will have effectively ceased already). In other words, Trump could de-escalate or escalate and we don’t believe anyone (including his closest advisors) have any idea what he will do. However, if things get really bad, we believe that Congress will be forced by their constituents to step in and reverse some of the recent tariffs.

Markets

As of this writing, the headline benchmark S&P 500 has declined roughly 10% from its close on Wednesday afternoon and many indices are close to (or already in) bear market territory (defined as a decline of 20% from the highs). It goes without saying that the time to de-risk portfolios and/or sell assets is before a crash (rather than after), but below is how we are thinking and approaching the current environment.

We often share that volatility is the price of admission to access the higher returns generated by equities. The reason that equities return more than bonds and cash is precisely because of days like these. Stocks could decline further (or much further), but we do know that stocks are a lot more attractive today than a week ago. For those who have been wanting more equity exposure, now may be a good time to begin buying and increasing exposure. Beyond that, we will continue to monitor closely and take advantage of the opportunities that arise from volatility, such as rebalancing and tax-loss harvesting.

While the negative stock market moves dominate the headlines, it is important to remember that headlines are not your portfolio. Our equity models are geographically diversified (and international has held up much better this year) and tend to have a slight value tilt (which has avoided the pain from the overvalued “Mag7” this year). We understand that the speed and severity of equity market declines are unsettling, but it is important to keep things in perspective and understand how much (or little) of an impact the equity market actually has on a portfolio.  For example, on a YTD basis, the S&P 500 is down -13.63%, the MSCI EAFE index is down -4.42%, and the MSCI Emerging Markets index is down -6.29%.  As you can see, geographical diversification does matter.

Most portfolios also have an allocation to other asset classes, such as fixed-income and alternative investments. Our fixed-income model is about as high-quality as it ever gets and has benefited from the rally in government bonds and avoided the pain in corporate credit. Many of the alternative investments that we allocate to are up for the year as well. That being said, we are cautious and not too eager to start making big bets in fixed-income or alternative investments.

Conclusion

Given the policy uncertainty and market volatility, diversification and asset allocation are important as ever. We do not want to lean too far in any one direction and want to ensure that we have multiple uncorrelated sources of return. Tariff negotiations could send the market a lot higher, while escalation could dampen economic activity and market performance further. Of course, there are a multitude of other scenarios that could unfold as well and investors must prepare accordingly. Thank you for your continued trust and please do not hesitate to reach out if questions come up.

 

Matt Shibata, CFA, CAIA
Managing Partner

 

 

Morling Financial Advisors, LLC (“MFA”) is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about MFA’s investment advisory services can be found in its Form ADV Part 2 and/or Form CRS, which is available upon request.
The opinions expressed are those of MFA. The opinions referenced are as of the date of publication and are subject to change due to changes in the market or economic conditions and may not necessarily come to pass. Forward-looking statements cannot be guaranteed. Material presented has been derived from sources considered to be reliable, but accuracy and completeness cannot be guaranteed. The investment strategy or strategies discussed may not be suitable for all investors. Be sure to consult with a tax professional before implementing any investment strategy.
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