Bond market hands Trump administration the dunce cap

The consequences of liberating U.S. assets of their performance

In the runup to U.S. President Trump’s tariff announcements, economists and research analysts worked feverishly to produce comprehensive summaries of the various trade barriers imposed against the U.S. by nations around the world. This was a difficult undertaking, as tariff and non-tariff measures are applied in countless product categories and industries, and their lack of uniformity necessitates a healthy dose of subjectivity to quantify.

Clearly the U.S. administration shared in their frustrations, as “Liberation Day” featured a giant cardboard sign, a drastically simplified calculation based on trade balances, and much-more-punitive-than-expected tariffs on almost every nation (including uninhabited islands home to robust penguin populations). While most measures outside of a “baseline” universal 10% tariff (and an eye-popping cumulative 145% levy against China) have since been paused, the announcement sent a shockwave through financial markets.

Bond investors put the stick about

The initial casualty has been U.S. assets. As per the chart below, stocks, bonds, and the U.S. dollar all fell simultaneously since April 2. This is unusual for a major developed nation. A coordinated selloff in all of a country’s major asset classes typically occurs in emerging markets when a crisis (political, economic, or otherwise) causes foreign investors to rush for the exits. In this case, it was likely the plunge in U.S. Treasuries that caused Trump to blink on tariffs, as shades of a “Liz Truss moment” (where bond yields in the U.K. surged in response to a profligate budget) became a threat to financial stability.

Looking ahead, the looming question is whether erratic U.S. policymaking will push foreign central banks and institutions to repatriate or reallocate U.S. Treasury holdings (or at minimum discontinue future purchases).

While Trump and his team fret over Treasury yields, investors are left to ponder over the “U.S. exceptionalism” narrative, which until recently helped power a roaring bull market in the largest U.S. stocks. The story had already suffered a major setback late last year when Chinese startup DeepSeek’s R1 large language model called into question the perceived moat around U.S. companies’ lead in the artificial intelligence field.

With ambitious growth expectations already embedded in their valuation multiples, U.S. mega-caps now face new vulnerabilities from potential international retaliation and boycotts (their size and global scale may make them easy targets), and wavering consumer confidence at home. However, a whole generation of investors has come of age in an environment where U.S. technology stocks were a one-way bet. Accordingly, there will likely be a strong “buy on weakness” impulse that could be hard to shake.

Currency gains offset bumpy ride for international assets

International assets have also had a bumpy ride this month, but currency gains have helped to mitigate some of the volatility. Stocks in the Eurozone and Japan have fared better than their American counterparts, despite having a notably higher degree of trade sensitivity in their respective indices.

While true that nobody wins in a trade war, the decision by the U.S. to pick a fight with everyone at the same time has eroded the nation’s advantage in trade negotiations and poured cold water on an economy that was previously humming along at an impressive clip. The focal points for international investors will now be prospective trade deals, their terms and substance, and what domestic support measures will be introduced to help offset any hit to exports.

The upside for the U.S. is less clear. While trade deals can be made, trust in the U.S. as a reliable partner has been badly shaken. Investors may demand a “policy premium” on U.S. assets to compensate for the constant uncertainty emanating from the White House. But worst-case scenarios should be avoidable. While the media is abuzz with talks of a deep recession and stagflation, that is not our base case scenario as private sector balance sheets are starting from a strong position, and leverage in systemically important financial institutions is not high. U.S. GDP is also driven more by services than goods.

Investment implications

Here’s a top-line summary of our asset strategy in the second quarter.

Cash and currencies. Despite falling domestic short rates, cash remains a viable source of portfolio stability during market turbulence. However, instead of solely holding excess cash to offset equity risk, we have elected to implement a diversified approach of cash, increased (and longer duration) fixed income allocations and gold. Cash has been increased modestly in client portfolios.

Bonds. U.S. trade policy is contributing to investor anxiety, elevated volatility, and a wider range of potential economic outcomes. Additional “shock absorption” is thus warranted in client portfolios. Developed markets fixed-income exposure has been increased this quarter.

Equities. The fiscal impulse in Europe has gapped higher, as Germany and the EU have recently made significant commitments to defense, security, and infrastructure spending. With central bank rate cuts already easing monetary policy, a pivot to fiscal expansion should help offset trade and geopolitical uncertainty and provide a much-needed growth impetus for the continent. Pro-cyclical European financial sector stocks are well-suited to benefit from this pivot and have been added to in client portfolios.

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David Kletz, CFA, is Vice President and Lead Portfolio Manager at Forstrong Global Asset Management. This article first appeared in Forstrong’s Insights Blog. Used with permission. You can reach David by phone at Forstrong Global, toll-free 1-888-419-6715, or by email at dkletz@forstrong.com.

Disclaimers

The foregoing is for general information purposes only and is the opinion of the writer. The author and clients of Forstrong Global Asset Management may have positions in securities mentioned. Performance statistics are calculated from documented actual investment strategies as set by Forstrong’s Investment Committee and applied to its portfolios mandates, and are intended to provide an approximation of composite results for separately managed accounts. Actual performance of individual separate accounts may vary with average gross “composite” performance statistics presented here due to client-specific portfolio differences with respect to size, inflow/outflow history, and inception dates, as well as intra-day market volatilities versus daily closing prices. Performance numbers are net of total ETF expense ratios and custody fees, but before withholding taxes, transaction costs and other investment management and advisor fees. Commissions and management fees may be associated with exchange-traded funds. Please read the prospectus before investing. Securities mentioned carry risk of loss, and no guarantee of performance is made or implied. This information is not intended to provide specific personalized advice including, without limitation, investment, financial, legal, accounting or tax advice.

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