Uncertainty has defined financial markets this year. It’s not going away because the source of the problem is the Trump administration.”
The driving force? Tariffs.
“President Trump has sometimes backpedaled when the markets have plunged. But he and other members of his administration have made it clear that higher tariffs of some sort are here,” despite their unpopularity and warnings from most economists.
The consequences are evident: “The risk of higher inflation and slower economic growth, along with strained relations with China and with many erstwhile allies, now appears to be a fact of life.”
And Trump isn’t hiding his stance: “Mr. Trump says he is at heart ‘a tariff man’ and wants to change the world. It’s wise to believe him.”
Bonds: More Turbulence Ahead
“The Treasury market has gotten considerable attention lately because, in response to the tariff announcements, yields rocketed and prices sank in a manner that has, in the past, been associated with full-blown financial crises.”
There’s potential for further instability: “The chances of further eruptions are high. They may even be set off by other parts of the Trump policy tool kit — say, the president’s goal of extending tax cuts that expire this year and adding new ones.”
Adding to this pressure is the administration’s “goal of weakening the value of the dollar to make U.S. exports more competitive and imports more expensive.”
Stephen Miran, before heading to the Council of Economic Advisers, suggested “unorthodox proposals” for keeping the dollar central in global finance while also devaluing it — a challenge “even under the best of conditions.”
And it’s already affecting sentiment: “Global investors are already having second thoughts about the wisdom of holding U.S. dollars and Treasuries.”
As Nellie Liang of the Brookings Institution observed, “increasing doubts about Treasury securities as the pre-eminent global safe-haven asset” are “consistent with the decline in the dollar.”
She warned, “A re-pricing of Treasury debt for this reason would be very consequential, forcing the U.S. government to pay more to borrow to finance deficits and raising the costs of borrowing for businesses and households.”
Investing in Times of Crisis
“What is clear is that under these conditions, it’s harder to be a long-term investor.”
That doesn’t mean panic — but it does require thought: “The standard advice in a crisis is to avoid doing anything hasty… Evaluate your own strategy.”
Especially important for those saving for education, retirement, or big life purchases: “Figure out how much money you’re going to need fairly soon because both the stock and bond markets have become much more volatile.”
And when volatility looms, cash is comfort: “When I sense a crisis may be coming, I bulk up my cash holdings in safe interest-bearing accounts… Money market funds, high-yield savings accounts and short-duration certificates of deposit are good for this purpose.”
For those retired or close to major expenses, “safety may be your predominant concern… Well-stocked interest-bearing accounts can be a balm in times of trouble.”
Diversify Without Overcommitting
“Broadly diversified portfolios holding stocks and bonds from around the world have been outperforming the U.S. stock market this year.”
Rather than betting on one country, the safer strategy is: “diversifying among many markets, using low-cost index funds.”
The writer’s own portfolio? “It resembles the Vanguard Target Retirement 2030 Fund… about 60 percent stock and 40 percent bonds, with roughly two-thirds focused on U.S. markets and one-third on international ones. It’s down 2.5 percent this year.”
There’s a reason for that balance: “Traditionally, you add bonds to your portfolio for greater safety and add stocks for long-term growth.”
And the long-term returns speak for themselves: “From 1926 through 2023, large U.S. stocks returned 10.3 percent annualized, while U.S. government bonds returned 5.1 percent, including dividends.”
Brace for Ongoing Disruption
“Mr. Trump is deliberately breaking with past U.S. policies in many ways, adding stress to financial markets.”
That shift means reassessing risks: “You may want to take that into account when assessing the risks you are bearing.”
Markets are reacting fast: “The stock market has already had abrupt reactions to tariff announcements, and I expect more to come.”
And so-called “buy the dip” strategies? They might not be as safe as they once seemed: “Jumping into the stock market when it falls… may not look like a brilliant approach if the market falls further.”
The same applies to bonds: “Buying bonds after yields have risen… could also backfire if there’s more distress in the bond market and yields keep rising.”
Dollar-Cost Averaging: A Long-Term Strategy
“Long-term investors — with a horizon of at least a decade and preferably longer — can practice what’s known as dollar-cost averaging.”
The idea is simple: “The average cost of your investments will be lower if you keep buying when the market is down.”
It only works if the markets eventually rise — and while the author still believes they will, there’s a caveat: “That’s an assumption I continue to make, though I’m nervous now.”
Still, change could shift momentum: “Congress may enact tax cuts big enough to set off a powerful rally, and the Trump administration’s wholesale slashing of rules and regulations could unleash jubilation on Wall Street.”
Don’t Count on Treasuries as a Safety Net
“Still, the administration’s policies make it less certain that Treasuries will serve as an effective shield in a possible stock market downturn.”
A cautious alternative? “Holding shorter-duration Treasuries… They won’t move much in price if the market shifts and are a safe short-term bet.”
But there’s a trade-off: “They won’t rise in value in recessions as much as longer-term bonds will, and they won’t offset stock portfolio losses, either.”
Conclusion: Prepare for a Riskier World
“It’s a more hazardous world now. Invest for the long haul and hope for the best, but do prepare for trouble.
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