Uncertainty has defined financial markets this year. It’s not going away because the source of the problem is the Trump administration.
Tariffs are the main financial issue. 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, even though they are unpopular and most economists say they are a mistake. 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.
Mr. Trump says he is at heart “a tariff man” and wants to change the world. It’s wise to believe him. In fact, I think it’s time to accept that disruption is here to stay. This is causing problems for investors. Yet even in times of turmoil, there are new investment opportunities.
Bonds are a case in point. 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. That market has calmed down a bit, but 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, enormously expanding the federal budget deficit and the Treasuries needed to finance it.
Another administration policy goal may be causing problems for bonds: weakening the value of the dollar to make U.S. exports more competitive and imports more expensive. (Tariffs, of course, do that to imports, too.) In a densely written paper published in November when he was still in the private sector, Stephen Miran, now the head of the Council of Economic Advisers, made unorthodox proposals for accomplishing this feat while, at the same time, maintaining the dollar’s role as the center of world finance. Achieving this would be difficult under the best of conditions. But adding this ingredient into the volatile mix of administration goals has undoubtedly unsettled the bond market further.
Global investors are already having second thoughts about the wisdom of holding U.S. dollars and Treasuries, and the dollar’s value has been falling. As Nellie Liang, former under secretary of the Treasury for domestic finance, put it in a piece for the Brookings Institution, some investors speculate that the cause of the furor in Treasuries comes from “increasing doubts about Treasury securities as the pre-eminent global safe-haven asset, consistent with the decline in the dollar.”
“A re-pricing of Treasury debt for this reason would be very consequential,” she added, “forcing the U.S. government to pay more to borrow to finance deficits and raising the costs of borrowing for businesses and households.” It will take time to “disentangle” the causes and the gravity of the problem, she said.
What is clear is that under these conditions, it’s harder to be a long-term investor. Many people can ignore these shifts and hang on to their government bonds and bond funds. And those looking to lock in high yields may find occasional bargains, when Treasury yields jump close to 5 percent, as they did earlier this month. But everyone — even if not an investor — is being exposed to innumerable risks that may not be entirely appreciated.
Safety First
The standard advice in a crisis is to avoid doing anything hasty, and that’s wise counsel. Evaluate your own strategy. If it’s sound, there may be no need to make any changes.
Say you’ve got money in a workplace account like a 401(k), an individual retirement account, a 529 account for education or a taxable account where you’re putting money away for an important purpose like buying a house.
Figure out how much money you’re going to need fairly soon because both the stock and bond markets have become much more volatile. That means the chances are higher that you may have to accept losses if you need to sell securities to raise cash.
When I sense a crisis may be coming, I bulk up my cash holdings in safe interest-bearing accounts so I won’t need to dip into core investments in a downturn. Money market funds, high-yield savings accounts and short-duration certificates of deposit are good for this purpose.
If you are retired and living off your investments or planning to send a child to college, safety may be your predominant concern. In that case, consider whether you need more liquid assets than you did in quieter periods for the markets. Well-stocked interest-bearing accounts can be a balm in times of trouble.
Riskier Holdings
For core investments, note that broadly diversified portfolios holding stocks and bonds from around the world have been outperforming the U.S. stock market this year. Such portfolios have had low, single-digit gains or losses — much better than the nearly 10 percent decline, including dividends, of the S&P 500 stock index.
But betting exclusively on any particular market is risky. Over the last 20 years, the U.S. stock market has outperformed most others. I don’t know what the future will bring, so diversifying among many markets, using low-cost index funds, makes sense to me.
My own portfolio resembles the Vanguard Target Retirement 2030 Fund, which is geared toward people who might want to retire in five years. Its holdings are 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.
Traditionally, you add bonds to your portfolio for greater safety and add stocks for long-term growth. Younger people may even want to put almost all of their long-term savings in stocks, though there is, of course, a risk of losses, now or in the future. Historically, stocks have performed far better than bonds. According to Morningstar, the financial services company, from 1926 through 2023, large U.S. stocks returned 10.3 percent annualized, while U.S. government bonds returned 5.1 percent, including dividends.
That’s the standard advice, and I’m basically following it, with a pronounced global tilt.
That said, Mr. Trump is deliberately breaking with past U.S. policies in many ways, adding stress to financial markets.
You may want to take that into account when assessing the risks you are bearing.
Personal Decisions
The stock market has already had abrupt reactions to tariff announcements, and I expect more to come. High tariffs are likely to dent corporate earnings. And they have increased the chance of a recession. Jumping into the stock market when it falls — “buying the dips” — may not look like a brilliant approach if the market falls further and you were counting on a quick profit.
The bond market has been volatile, too. Buying bonds after yields have risen (and prices, which move in the opposite direction, have dropped) could also backfire if there’s more distress in the bond market and yields keep rising.
Long-term investors — with a horizon of at least a decade and preferably longer — can practice what’s known as dollar-cost averaging by investing steadily. The average cost of your investments will be lower if you keep buying when the market is down.
You will come out ahead in the end, assuming the markets eventually rise. That’s an assumption I continue to make, though I’m nervous now. But who knows? 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.
Still, the administration’s policies make it less certain that Treasuries will serve as an effective shield in a possible stock market downturn. One answer is holding shorter-duration Treasuries. They won’t move much in price if the market shifts and are a safe short-term bet. But they won’t rise in value in recessions as much as longer-term bonds will, and they won’t offset stock portfolio losses, either.
It’s a more hazardous world now. Invest for the long haul and hope for the best, but do prepare for trouble.
