Market Strategists Discuss Tariff Pause, CPI, and Diversification Strategies

Impact of Tariff Developments

• ⚠️ Despite a recent pause in tariffs, which is positive for the US and global economies by removing worst-case scenarios, tariffs remain at century-level highs, posing challenges for businesses and the global economy.
• 💡 Companies will need to decide whether to pass increased costs onto consumers or absorb them into profit margins, likely resulting in a combination of both.
• 📈 This dynamic creates a challenging environment for equity valuations moving forward.

Shifting Market Outlook and US Exceptionalism

• 🇺🇸 While the tariff news is better than a week ago, questions about American exceptionalism and the 'sell America' trade persist due to ongoing tariff levels.
• 🌍 Actions by other countries, such as increased defense and infrastructure spending in Europe, are galvanizing economic foundations and leading to upgraded growth forecasts for future years.
• 🚀 Elements of policy supporting 'animal spirits' and US exceptionalism are still anticipated, but the impacts of tariffs are yet to be fully felt.

Navigating Market Volatility

• 📊 The market is expected to be two-way volatile, with fluctuating inflation rates and valuations.
• 🗺️ Geographic diversification is crucial, with a consideration for value-add potential assets globally, balancing US assets with previous underweights in Europe and Asia.
• 🎛️ Asset class diversification is also recommended, exploring equity-like risks in credit or private markets, particularly in the lower middle market for value creation and income generation.

Inflation and Federal Reserve Policy

• 📈 A benign CPI report, around the expected 2.8% for core CPI, is considered good news, acting as 'no news' in a disinflationary environment.
• 📉 Headline inflation is expected to be weighed down by seasonal factors and disinflating goods prices due to inventory build-ups.
• 🏦 The Federal Reserve is expected to do as little as possible given the uncertain economic backdrop and the potential for inflation re-acceleration, pushing out the timeline for rate cuts.
• ⏳ The market is moving past the immediate CPI print, with any significant impact from tariffs on inflation expected to be subdued and temporary, likely delaying rate cut expectations.