Our Take- The Kryptonite for Investors Is Uncertainty: Can we separate the signal from the noise?

With the election in November came a release of “animal spirits” focused on lower taxes and decreased regulation. Not so fast. Two long standing policy goals (obsessions) dating to Trump’s first term may tamp down some of the sugar high; 1) Higher tariffs, 2) Rollbacks in immigration. Taken to extremes both agendas can have negative impacts on economic growth and could lead to higher inflation. If we thought the price of eggs was high last summer, the effects of stagflation would truly shock the senses. This note, however, is not a discussion of the merits or demerits of either policy but, instead, a look at how uncertainty weighs heavily on the financial markets and can, itself, dampen growth.

For a CEO or portfolio manager to make an investment, they want steady, predictable and understandable rules, laws and regulations. A level playing field allows for informed decision making and desirable outcomes. Risk mapping and contingency planning in the era of AI and complex data sets are difficult enough without worrying about massive new cost inputs or retaliatory measures leading to eroding markets. 

Other considerations would be: 

• Whether to move forward with mergers and acquisitions (M&A) plans - perhaps holding off, pending better visibility. M&A are off to their slowest start in ten years.
• Borrowing for long term growth versus derisking the balance sheet to weather a storm.
• Making long-term supply chain decisions.
• Navigating Unclear Policies on Offshoring and Friendshoring – Understanding which products or components are subject to tariffs and which are exempt is critical in today’s shifting trade landscape.

For example, Toyota could gain a significant cost advantage over Ford if Japan secures more favorable trade agreements, while Canadian manufacturers may face steep tariffs of up to 25%.

Consider John Deere, a leading U.S.-based multinational. Could it be hit with high retaliatory tariffs in Europe or Mexico? Would this lead to a loss of market share, shrinking margins, or both? Additionally, if key components shipped to the U.S. for final assembly are subjected to tariffs, production costs could rise.  

With so much uncertainty, the default strategy for many companies is to hold off on major decisions until clearer policies emerge.

The Trump administration effectively put the Foreign Corrupt Practices Act (FCPA) out of commission last week. The order did not elicit the cheers from corporate America that you might have expected. Moves to weaken the law could backfire on multinationals by actually raising the cost of doing business overseas. 

Remember, Trump attempted to dismantle the FCPA early in his first term, but the effort was decisively halted by then-Secretary of State Rex Tillerson, former CEO of ExxonMobil. Tillerson understood that a rules-based system benefited not only major oil companies but also a vast majority of U.S. multinationals.

Steps We’re Taking

• First and foremost, we take a strategic, measured approach to risk management, aiming to minimize exposure to market volatility caused by unpredictable events like fluctuating tariff policies. Our primary tool for reducing risk is asset reallocation, shifting investments away from stocks and into more stable asset classes. In practice, this often means increasing allocations to fixed income and cash, providing greater stability in uncertain market conditions.
• If the stock market continues to perform well, we capture those gains through our allocated equity holdings. At the same time, increasing our fixed income allocation enhances our defensive positioning while providing a steady stream of cash flow, ensuring a balanced approach to both growth and stability.

More draconian steps that we haven’t seen fit to deploy (at this stage) include an allocation to gold and short-term hedges designed to neutralize volatility.

Our next update is scheduled for mid-year. Hopefully, by then, we’ll have gained greater clarity in a more predictable business environment. Meanwhile, the ride may be bumpy at times, but this isn’t our first rodeo, and we know volatility works both ways. 

All the best,

Ken & Michelle

This information has been drawn from sources believed to be reliable. Every effort has been made to assure the accuracy of the information, however, the accuracy of this information is not guaranteed. All investing is subject to risk, including possible loss of money you invest. Diversification does not ensure a profit or protect against a loss. The information provided in this commentary is for informational purposes only and is not a solicitation to buy and/or sell. Investors must consider the investment objectives, risks, charges and expenses of any investment carefully before investing. Avisen Wealth Management (Member FINRA/SIPC) does not provide tax or legal advice. Please consult your accountant &/or legal counsel for guidance. Avisen Wealth Management, CA Ins License #0E52062