Tariff Shock: Managing a Portfolio Through the Turmoil

With uncertainty in abundance, we think investors should avoid drastic moves.

Multi-Asset Insights
Portfolio Construction
Risk management
Politics

Key Points

What it is

We outline our portfolio approach amid the volatility caused by U.S. tariff hikes.

Why it matters

Investors may consider drastic portfolio moves in this kind of market that could backfire.

Where it's going

We’re preparing for a range of outcomes in this kind of uncertainty while avoiding extreme moves that could hinder performance.

Significant U.S. tariff hikes that exceeded market expectations have sparked a swift, negative reaction, pushing the U.S. equity market down almost 20% below recent highs. Investors struggling to manage their portfolios through this unpredictable market may consider cutting their stock holdings drastically, but we prefer a more surgical approach. Let’s take a closer look.

While U.S. equities have faltered with an increasing chance of recession and higher inflation, European equities have outperformed. Exports to the U.S. support only around 2% of Europe’s economy the economic outlook is more stable, and stocks are cheaper versus the U.S. In our global model that guides Northern Trust portfolio allocations, we trimmed exposure to U.S. equities and increased the allocation to developed-market stocks outside the U.S.

Despite the tariff turmoil, we still favor equities globally, including an overweight to U.S. stocks even after trimming the allocation. Markets have proven susceptible to fluid tariff polices, and we think sharp equity rallies are likely. While we trimmed exposure to high yield bonds slightly, we still favor them as they have historically helped to soften the impact of equity downturns and participated in rallies. High yield bonds have held up relatively well in this market.

To be sure, we see a better-than-even chance of recession as a soft economic landing becomes less likely. We expect the Federal Reserve to continue to cut interest rates to support economic growth, though the threat of tariff-fueled inflation could complicate the timing of Fed moves. With this high amount of economic and tariff uncertainty, we are wary of overcorrecting into a defensive position.

Main Point

A Strategic Response to Tariff-Driven Volatility

After a steep market loss sparked by unexpected U.S. tariffs, some investors may consider drastic cuts to stocks in their portfolios. We highlight a more selective approach of surgically adjusting equity exposure and maintaining exposure to high yield bonds.

Recalibrating for Higher Risk Without Overcorrecting

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Michael Hunstad, Ph.D.

Portfolio Manager

Michael Hunstad is the deputy CIO & CIO of global equities at Northern Trust Asset Management. He serves on the asset management executive group, and leads all equity portfolio management and research for quantitative, index and tax-advantaged strategies. He co-manages the Northern International Equity Fund, Northern Large Cap Core Fund, Northern Small Cap Core Fund and Northern Small Cap Value Fund.

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IMPORTANT INFORMATION

Northern Trust Asset Management (NTAM) is composed of Northern Trust Investments, Inc., Northern Trust Global Investments Limited, Northern Trust Fund Managers (Ireland) Limited, Northern Trust Global Investments Japan, K.K., NT Global Advisors, Inc., 50 South Capital Advisors, LLC, Northern Trust Asset Management Australia Pty Ltd, and investment personnel of The Northern Trust Company of Hong Kong Limited and The Northern Trust Company.

Issued in the United Kingdom by Northern Trust Global Investments Limited, issued in the European Economic Association (“EEA”) by Northern Trust Fund Managers (Ireland) Limited, issued in Australia by Northern Trust Asset Management (Australia) Limited (ACN 648 476 019) which holds an Australian Financial Services Licence (License Number: 529895) and is regulated by the Australian Securities and Investments Commission (ASIC), and issued in Hong Kong by The Northern Trust Company of Hong Kong Limited which is regulated by the Hong Kong Securities and Futures Commission.

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