• The tariffs announced on 2 April represent one of the largest trade shocks in the past century and were higher and broader than we anticipated.
  
  
• We’re now in a period of high uncertainty as we await the impact of the tariffs, how they affect companies and economies and what the timeline could be for negotiating the tariffs.
  
  
• Amid the prospect of further volatility, investors should continue to focus on their long-term goals and the downside buffer that diversification can provide when markets fall.

Why the markets have become so volatile

Global trade dynamics and market volatility
 

• While we expected tariffs from the new US administration, the tariffs enacted are higher and broader than expected. The market reaction reflects how significant of a trade shock the tariffs are.
  
  
• There will be ramifications in terms of spending, especially for consumers, as prices rise – likely resulting in stagflation (high inflation combined with slower demand). Retaliatory tariffs could compound the challenges.
  
  
• While we will likely see negotiation on tariffs, the timeline is not clear and thus we are in a period of high uncertainty. The combination of uncertainty, slowing growth, higher inflation and already-elevated US equity valuations has led to a significant market sell-off.
   

The near-term economic outlook

Potential macroeconomic impacts  
 

• In terms of the economic impact in the coming months, we will likely see slower growth across countries, including the US. We can expect higher prices in many areas, although the prices of certain goods (such as energy) could fall given lower demand.
  
  
• We anticipate rounds of negotiations between governments to address the tariffs. The longer this process takes, the greater the short-term economic drag will be.
  
  
• While we don’t expect the US to slip into recession, it could be close. We do expect some countries outside the US to enter into recession. Investors will likely need to operate in an environment of elevated uncertainty for the next several months.
   

The power of a diversified portfolio

Diversification and downside risk  
 

• In an environment of heightened volatility, we know that diversification—across regions, sectors and asset classes—is critical to investment success.
  
  
• Diversification does not mean, however, that investors won’t experience losses, but rather that investors can moderate those losses.
  
  
• We continue to believe that holding a mix of broadly diversified equities and bonds is the appropriate approach, although investors should understand that in the current environment the value of diversification will be in downside protection and that markets may endure losses for a period of time. 
   

The risk of economic recession

Uncertainty and the economy  
 

• The key drivers of uncertainty are rising costs, softening demand and supply-chain disruptions – which can all have an impact on corporate earnings and the health of economies.
  
  
• Whether an economy might slip into recession will depend on its specific conditions. The US had decent economic fundamentals before the tariff announcement but we wouldn’t rule out recession in the US – it will depend on negotiations.
  
  
• Many companies are now in wait-and-see mode. They don’t know if there will be further tariff increases, what the economic impact of the tariffs will be or if the tariffs will lead to weakening demand (and thus lower sales and revenues).
   

Assessing risk through economic and market forecasting

Forecasting and asset allocation  
 

• Our economic models incorporate a range of economic scenarios, including those that have taken place and those that haven’t. We also account for market fundamentals – which are not the same as the economy.
  
  
• We look at potential outcomes to test the resilience of different portfolios and investment strategies. For example, we aim to determine the likelihood of achieving certain returns over a given period and whether that is consistent with an investor’s goals.
  
  
• Our mission in forecasting is not to outsmart the market, but rather to better understand potential risks (to the upside and downside) and help investors use that knowledge to approach their long-term investment plans. 
   

The power of sound financial advice

The power of sound financial advice
 

• Volatile markets provide an opportunity for advisers to help clients to understand the importance of asset allocation, diversification and keeping perspective.
  
  
• Investors are humans and can’t be expected to ignore headlines when markets turn choppy. The power of advice lies in helping investors to stay focused on their long-term goals and not get caught up in short-term turbulence.
  
  
• Beyond asset allocation and behavioural coaching, advice also plays a role in ensuring investors approach their investments in the most tax-efficient way.