Trump, Tariffs and Transition: How Investors Can Thrive in the Coming Storm
Readers of Benjamin Graham will be familiar with the allegorical character of “Mr. Market”, who personifies the volatile and often manic swings in stock market sentiment.[1] As we all know, movements in a stock price, especially sudden movements, often reflect the emotions of holder rather than value of the holding itself.
Mr. Market has certainly been active in the first few months of 2025. February 19th saw the S&P 500 reach an all-time high, only to begin a precipitous decline continuing into early March.[2] As of now, it is close to ‘correction’ territory (-10%), and has given rise to speculation about a full-scale crash and/or economic recession this year.
While markets are emotional, no one has ever argued that they are completely irrational or their movements entirely random. The first question for investors is, therefore, what is the signal - if any - within the current noise? The second is, what can individual investors do in response? In this article, we attempt to answer both of these questions.
Is This Time Different?
There is a famous joke that economists have successfully predicted nine out of the last five recessions. Looking at the last few years, doom-laden predictions of an economic shock are nothing new.
The robustness of the US economy has surprised many if not most commentators, outlasting a pandemic (2021), a supply crisis combined with runaway inflation and a bear market (2022), and a banking scare (2023). Until late last year, a tentative consensus was forming around the idea that the fabled “soft landing” (bringing down inflation without harming employment) had been achieved.[3]
What is different this time? For some analysts, the answer can be reduced to a single word: Trump. Initially, markets responded positively to the election results of last year.[4] This was likely based on the belief that the new administration would adopt business-friendly policies and introduce tax cuts to stimulate growth.
The first few months of the Trump administration have been far from dull. Various episodes - perhaps most notably the UN vote on Ukraine[5] - have reminded observers that it is not easy to predict the president next’s move. At the current moment in time, all eyes are on trade policy.
The T-Factor
Markets have been aware for some time that the Trump administration, no stranger to trade wars, plans to make aggressive use of tariffs during its second term. There was an additional assumption, however, that such measures would be largely in the spirit of brinkmanship and therefore temporary.
In the Fox News interview that sparked the March sell-off, the president used wording that implied that his plans for the US - in which tariffs will play a key role - are more structural in nature,[6] and that further short-term turbulence during this ‘transition’ (possibly, though not explicitly including a recession) may be a reasonable cost.
Analysts have since updated their models to account for the possibility of extensive and prolonged tariffs, and their corresponding impact on consumer confidence, business investment and overall GDP. Major institutions have also raised the probability of a recession, which currently sits in the range of about 20-40%.[7]
Barring a few warning signs (e.g. lower consumer spending, higher jobless claims[8]), the current data indicate that the US economy is ‘in a good place’, to quote Fed Chairman Jerome Powell.[9] In other words, the sky is not falling – yet.
The Wide-Lens View
It is always tempting to chase trends - indeed, this is Mr. Market’s core investment philosophy. Doing so often leads to concentrated positions and sub-optimal timing. For example, piling into the “Magnificent 7” tech stocks (already a substantial portion of the S&P 500 index) and then selling amid the panic surrounding the DeepSeek model (which was very quickly revealed to be overblown).[10]
Attempting to predict unpredictable events, particularly when the decision-makers are undecided and at the mercy of events themselves - is a tempting but futile endeavor. To many, it seems to be better than doing nothing. But there is a third alternative.
The very fact that we are living in uncertain times suggests that diversification is more important than ever.
The problem is that traditional approaches to diversification such as the 60:40 portfolio have, in recent years, proven highly unreliable during periods of turbulence. Investors will recall that the stock-bond correlation turned positive in 2022, causing holders of 60:40 portfolios to suffer losses of 16% for the year[11].
Source: Morning Star
Given this development, it would seem wise to explore non-traditional means of diversification. In other words, alternatives such as hedge funds, insurance-linked securities, and private markets (equity and credit).
Conclusion
While it is - and will always be - true that a truly diversified portfolio is the only reliable path to navigating a stormy market, it is no longer the case that diversification is the “free lunch” it is often described as.
Investors venturing outside the traditional realm into alternative territories such as private markets face a tougher challenge than simply buying an index or following a set formula. That said, this is not uncharted territory. Universities have for many decades been pursuing an alternatives-heavy approach (“the endowment model”), which trades liquidity for lower volatility, especially during years such as 2022.[12] With a long-term mindset, and access to the right team, any investor can benefit from this approach.
Mr. Market will never change, but he does not control all prices. 2025 is a good year to stay as far out of his reach as possible.
