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American trade policy certainly appears to be the primary driver of financial markets right now. As threats of new tariffs have emerged and it becomes increasingly likely that the administration intends to follow through and implement them as policy, volatility has soared and outlooks for the economy have fallen. The Atlanta Fed forecasting model shifted to negative GDP growth in the near term, several large wall street firms’ recession models realized significant increases in probability, and there were substantial drops in consumer sentiment and confidence surveys. The bond market has priced in greater likelihood of interest rate cuts throughout the year, almost assuredly due to expectations of the need to fight economic weakness. Afterall, restrictive trade policies combined with deep government spending cuts generally leads to weaker economic growth, according to mainstream economic theory.
While the opinion-based indicators mentioned above are quite negative, empirical data has come in more mixed. Unemployment and income data continue to show strength, though there were softer numbers regarding inflation, housing, and personal spending. It’s possible that the administration reverses course yet again on implementing tariffs and other undesirable policies, but absent this, expect consumer spending and corporate investment to wane with the risks and uncertainties of the current situation. Of course, interest rate cuts could provide stimulus to offset negative factors and help improve outlooks. From a technical standpoint, the S&P 500 and NASDAQ 100 stock indexes are flirting with their 200 day moving averages, threatening a breach that could be perceived as a harbinger of downside risk in equities.
Provizr portfolios this month engaged several risk-mitigating strategic adjustments, given current market conditions. Traditional bond rotations once again favor Intermediate-Term in place of Short-Term bonds, reflecting increasing demand for fixed income in anticipation of slowing economic growth. The Equity Sector rotation has shifted from the Consumer Discretionary sector to Utilities, further reflecting prevailing trends.
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