Liberation Day: Good, Bad, Scary? Donald Trump’s on-again, off-again trade war whipsawed financial markets in March, triggering an end-of-the-month sell-off on Wall Street. As I write these words, the S&P 500 has lost over 6.0% for the month and the Nasdaq is down nearly 9.0%. The Dow Industrials suffered the least, but the stalwart index of blue-chip companies is still off more than 4.0%.
It’s been a mixed bag for the strategies, with Bond Bulls, Global Trader and The 12% Solution holding up relatively well, and the more aggressive strategies (Five Stocks, White Knuckle and American Muscle) taking it on the chin. Of note, while Five Stocks largely holds on to powerhouse names and rides out short-term storms, the Knuckles and the Muscles are positioning themselves for more trouble ahead with larger stakes in U.S. Treasuries.
It’s been a mixed bag for the strategies, with Bond Bulls, Global Trader and The 12% Solution holding up relatively well, and the more aggressive strategies (Five Stocks, White Knuckle and American Muscle) taking it on the chin. Of note, while Five Stocks largely holds on to powerhouse names and rides out short-term storms, the Knuckles and the Muscles are positioning themselves for more trouble ahead with larger stakes in U.S. Treasuries.
Speaking of more trouble ahead…
Wall Street is nervously awaiting Trump’s “Liberation Day” on Wednesday, when he has promised to unveil an array of “reciprocal” tariffs on America’s trading partners, including 25% tariffs on imports of all foreign-made vehicles.
Should the president follow through, a number of economists and analysts warn of more persistent inflation and a hit to growth in the U.S. and beyond. The word stagflation is being bandied about more and more; an economic cycle characterized by slow growth and a high unemployment rate accompanied by inflation. Economic policymakers find this combination particularly difficult to handle, as attempting to correct one of the factors can exacerbate another.
Where’s the Fed in all of this?
Watching on the sidelines. At a Federal Reserve meeting mid-month, the central bank held interest rates steady, as widely expected. Fed Chair Powell emphasized a cautious approach, seeking "greater clarity" on trade policies before adjusting interest rates. Powell also said U.S. President Donald Trump's tariffs would only be "transitory."
We’ll see. The last time Powell used the word “transitory” was in reference to the post-COVID spike in inflation. That turned out to be not-so-transitory, and the Fed is still wrestling with that monster.
Going into April, here’s what we’ve got:
On the bright side, Scott Helfstein, head of investment strategy at Global X, said the news on inflation and consumer spending “was not that bad” and could simply represent a hiccup in near-term sentiment as investors struggle to understand the Trump administration’s new policies.
Also on the bright side, “We believe an intermediate-term low may be in place despite the heightened uncertainties surrounding tariffs and inflation,” says Piper Sandler chief market technician Craig Johnson in a note to clients. “It appears that equities have found some footing off the March lows from which to build upon in the upcoming weeks.”
And of course, there is Fundstrat’s Tom Lee, who believes markets will ultimately rebound from the tariff scare. “The combination of accommodative monetary policy and tariff resolution potential creates a unique ‘Trump put’ and ‘Fed put’ dynamic,” Lee wrote in a recent note. “This dual support mechanism could drive a strong equity rebound once clarity around tariffs emerges.”
Until that “clarity” emerges, keep your seatbelt fastened. I remain fully invested, but buckled up.
And For What It’s Worth…
It looked like a new and dangerous asteroid hurtling through space, closer to Earth than the moon itself. Harvard University-affiliated astronomers, on the edge of their seat, gave it a name: 2018 CN41. A potential planetary threat?
Not exactly. After 17 hours of worry, asteroid 2018 CN41 was deleted from its list of near-Earth objects. Turns out the “asteroid” was actually the cherry-red Tesla Roadster belonging to Elon Musk that was launched into orbit by the SpaceX Falcon Heavy spaceship on its inaugural flight in 2018 as part of a PR stunt, a mannequin in a spacesuit behind the wheel. The Asteroid That Wasn’t
As a side note, the car is predicted to remain in a long, elliptical orbit around the sun for tens of millions of years before potentially colliding with Earth or Venus.
Or the debris from Falcon 9 rocket stages left tumbling in space.
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
--David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.
Wall Street is nervously awaiting Trump’s “Liberation Day” on Wednesday, when he has promised to unveil an array of “reciprocal” tariffs on America’s trading partners, including 25% tariffs on imports of all foreign-made vehicles.
Should the president follow through, a number of economists and analysts warn of more persistent inflation and a hit to growth in the U.S. and beyond. The word stagflation is being bandied about more and more; an economic cycle characterized by slow growth and a high unemployment rate accompanied by inflation. Economic policymakers find this combination particularly difficult to handle, as attempting to correct one of the factors can exacerbate another.
- “Stagflation has become our base case scenario,” said Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International.
- “De-globalisation is a megatrend pushing in a stagflationary direction,” said Gerry Fowler, a European equity strategist at UBS.
Where’s the Fed in all of this?
Watching on the sidelines. At a Federal Reserve meeting mid-month, the central bank held interest rates steady, as widely expected. Fed Chair Powell emphasized a cautious approach, seeking "greater clarity" on trade policies before adjusting interest rates. Powell also said U.S. President Donald Trump's tariffs would only be "transitory."
We’ll see. The last time Powell used the word “transitory” was in reference to the post-COVID spike in inflation. That turned out to be not-so-transitory, and the Fed is still wrestling with that monster.
Going into April, here’s what we’ve got:
- Consumer sentiment not good. This past Friday, the University of Michigan’s Index of Consumer Expectations fell for a third straight month to hit the lowest level since 2022. The index focuses on how consumers view 1) the prospects for their own financial situation, and 2) the prospects for the general economy.
- Inflation not good. Friday’s core personal consumption expenditures price index came out hotter-than-expected, rising 2.8% in February and reflecting a 0.4% increase for the month, stoking concerns about persistent inflation.
- Tariff prospects not good. Re: “Liberation Day,”
On the bright side, Scott Helfstein, head of investment strategy at Global X, said the news on inflation and consumer spending “was not that bad” and could simply represent a hiccup in near-term sentiment as investors struggle to understand the Trump administration’s new policies.
Also on the bright side, “We believe an intermediate-term low may be in place despite the heightened uncertainties surrounding tariffs and inflation,” says Piper Sandler chief market technician Craig Johnson in a note to clients. “It appears that equities have found some footing off the March lows from which to build upon in the upcoming weeks.”
And of course, there is Fundstrat’s Tom Lee, who believes markets will ultimately rebound from the tariff scare. “The combination of accommodative monetary policy and tariff resolution potential creates a unique ‘Trump put’ and ‘Fed put’ dynamic,” Lee wrote in a recent note. “This dual support mechanism could drive a strong equity rebound once clarity around tariffs emerges.”
Until that “clarity” emerges, keep your seatbelt fastened. I remain fully invested, but buckled up.
And For What It’s Worth…
It looked like a new and dangerous asteroid hurtling through space, closer to Earth than the moon itself. Harvard University-affiliated astronomers, on the edge of their seat, gave it a name: 2018 CN41. A potential planetary threat?
Not exactly. After 17 hours of worry, asteroid 2018 CN41 was deleted from its list of near-Earth objects. Turns out the “asteroid” was actually the cherry-red Tesla Roadster belonging to Elon Musk that was launched into orbit by the SpaceX Falcon Heavy spaceship on its inaugural flight in 2018 as part of a PR stunt, a mannequin in a spacesuit behind the wheel. The Asteroid That Wasn’t
As a side note, the car is predicted to remain in a long, elliptical orbit around the sun for tens of millions of years before potentially colliding with Earth or Venus.
Or the debris from Falcon 9 rocket stages left tumbling in space.
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
--David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.
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