Tariff policy talks trigger market uncertainty

JACK JANASIEWICZ: Hi, I'm Jack Janasiewicz, Lead Portfolio Strategist for Natixis Investment Managers Solutions and also a Portfolio Manager on the Strategist Models.

BRIAN HESS: And I'm Brian Hess, Investment Strategist. Welcome to Tactical Take. All right, Jack, so for this month I think we'll start with what everyone's talking about, which is the new administration and the varied, specifically, trade policy. I mean, there's a lot going on with the new administration. But for our purposes today, I think let's hone in on the trade actions. And just initially, let's get your thoughts on some of the developments that have taken place thus far, how you interpret them, implications for markets. And we'll go from there.

JACK JANASIEWICZ: Yeah, and it's hard to believe what we're one month into this new administration. It certainly feels like we've been at this for almost a year now, just with all the things that have gone on. But I think from a perspective of markets, the one thing that everybody keeps asking about, it's the tariff policy and how that relates to the potential for inflation. And quite honestly, it's a challenging backdrop to kind of figure out how to think about the tariffs, only because, as we know, there are more of a transactional tool right now, it appears. If you go back and look at what's been announced so far, we were supposed to have tariffs on day one. Well, we didn't. We were supposed to have tariffs on Colombia. That got pulled back. Then we were supposed to have tariffs on Canada and Mexico. That got pulled back. And so far, the only thing that's been on the dockets is the 10% tariff on Chinese goods, which very well could be rescinded by the end of this week. So again, it's you're hearing one thing, and then a couple days later you get the reaction. And some of the some of these counterparties are coming to the negotiating table, which is partly the strategy here. And that's just making things very difficult. So as we keep telling the clients, it's sort of, we're thinking of these things more as a reaction perspective, as rather than trying to be proactive about it. Just because, so far, it just seems like these are much more of a transactional tool trying to bring people to the negotiation table, extract some concessions. And then we'll see what happens after that.

BRIAN HESS: And markets have been mostly rangebound for the past month. I think you've had maybe above average intraday volatility. But things haven't gone much of anywhere, whether it's stocks or bonds. Do you think the tariffs are kind of an overhang for markets right now? And until we get some certainty in terms of the direction we'll head, it could be difficult for risk assets to continue performing?

JACK JANASIEWICZ: I think there's something to that. Because when we look at the other two dynamics-- and they kind of go hand in hand-- like the underlying fundamentals of the economy are still pretty strong. Some of the data points are certainly supportive, potentially showing maybe a slowdown is coming. But again, we're slowing from that high level of growth. So even if we do slow, you're probably using something closer to trend, which is just fine.

BRIAN HESS: Right.

JACK JANASIEWICZ: And then we've basically gotten through the heart of earnings season. And earnings have actually been pretty good in here. And so that backdrop should be somewhat supportive, I think, for equities. And we're just seeing, to your point, that range trade. So I think that geopolitical uncertainty, that's putting a little bit of a cap on the markets. And maybe the one risk that's highlighted by this is simply, as this geopolitical uncertainty persists, maybe that could start to ultimately dent those animal spirits, the sentiment on the consumer and the business side. And maybe that starts to hurt us a little bit in the near term.

BRIAN HESS: Right. Because we were looking for a little bit of, I guess, the releasing of pent-up demand after the election, given that you'd finally have certainty in terms of the new administration. And I think the PMI surveys have suggested, at least in manufacturing, that's taken place. We've had two months in a row of good data. But I suppose the more back and forth we get that could stall out a little bit as we're back in the kind of wait and see mode. So it's a lot to try to analyze.

JACK JANASIEWICZ: Hi, I'm Jack Janasiewicz, Lead Portfolio Strategist for Natixis Investment Managers Solutions and also a Portfolio Manager on the Strategist Models.

BRIAN HESS: And I'm Brian Hess, Investment Strategist. Welcome to Tactical Take. All right, Jack, so for this month I think we'll start with what everyone's talking about, which is the new administration and the varied, specifically, trade policy. I mean, there's a lot going on with the new administration. But for our purposes today, I think let's hone in on the trade actions. And just initially, let's get your thoughts on some of the developments that have taken place thus far, how you interpret them, implications for markets. And we'll go from there.

JACK JANASIEWICZ: Yeah, and it's hard to believe what we're one month into this new administration. It certainly feels like we've been at this for almost a year now, just with all the things that have gone on. But I think from a perspective of markets, the one thing that everybody keeps asking about, it's the tariff policy and how that relates to the potential for inflation. And quite honestly, it's a challenging backdrop to kind of figure out how to think about the tariffs, only because, as we know, there are more of a transactional tool right now, it appears.

If you go back and look at what's been announced so far, we were supposed to have tariffs on day one. Well, we didn't. We were supposed to have tariffs on Colombia. That got pulled back. Then we were supposed to have tariffs on Canada and Mexico. That got pulled back. And so far, the only thing that's been on the dockets is the 10% tariff on Chinese goods, which very well could be rescinded by the end of this week. So again, it's you're hearing one thing, and then a couple days later you get the reaction.

And some of the some of these counterparties are coming to the negotiating table, which is partly the strategy here. And that's just making things very difficult. So as we keep telling the clients, it's sort of, we're thinking of these things more as a reaction perspective, as rather than trying to be proactive about it. Just because, so far, it just seems like these are much more of a transactional tool trying to bring people to the negotiation table, extract some concessions. And then we'll see what happens after that.

BRIAN HESS: And markets have been mostly rangebound for the past month. I think you've had maybe above average intraday volatility. But things haven't gone much of anywhere, whether it's stocks or bonds. Do you think the tariffs are kind of an overhang for markets right now? And until we get some certainty in terms of the direction we'll head, it could be difficult for risk assets to continue performing?

JACK JANASIEWICZ: I think there's something to that. Because when we look at the other two dynamics-- and they kind of go hand in hand-- like the underlying fundamentals of the economy are still pretty strong. Some of the data points are certainly supportive, potentially showing maybe a slowdown is coming. But again, we're slowing from that high level of growth. So even if we do slow, you're probably using something closer to trend, which is just fine.

BRIAN HESS: Right.

JACK JANASIEWICZ: And then we've basically gotten through the heart of earnings season. And earnings have actually been pretty good in here. And so that backdrop should be somewhat supportive, I think, for equities. And we're just seeing, to your point, that range trade. So I think that geopolitical uncertainty, that's putting a little bit of a cap on the markets. And maybe the one risk that's highlighted by this is simply, as this geopolitical uncertainty persists, maybe that could start to ultimately dent those animal spirits, the sentiment on the consumer and the business side. And maybe that starts to hurt us a little bit in the near term.

BRIAN HESS: Right. Because we were looking for a little bit of, I guess, the releasing of pent-up demand after the election, given that you'd finally have certainty in terms of the new administration. And I think the PMI surveys have suggested, at least in manufacturing, that's taken place. We've had two months in a row of good data. But I suppose the more back and forth we get that could stall out a little bit as we're back in the kind of wait and see mode. So it's a lot to try to analyze.

And probably the group with the biggest stresses about this right now is maybe the Federal Reserve, which I thought we'd transition to next. We had the Fed meeting a couple of weeks ago, and they decided to go on hold after a period of having lowered the policy rate. Were you surprised by that? I mean, the markets weren't priced for anything. So we kind of knew coming into the meeting that the Fed doesn't like shocking the market. So they were unlikely to do anything the day of.

But I guess my bigger question is, were you surprised the Fed guided the markets to a situation where they were prepared to go on hold after a series of cuts?

JACK JANASIEWICZ: No. I think it's exactly what we'd expected. Market came in, like you said, not expecting a rate cut. The market's really not expecting a rate cut until the back half of 2025. So with the outcome of some of the commentary there, I'd say it's right down the middle. But a couple of things maybe worth highlighting there. One, Powell did make the comment that we are still restrictive. So from that perspective, people are still arguing about the potential for a re-acceleration or reemergence of inflation. I'm not sure that necessarily triggers your rate hike, especially if Powell's been saying we're still restrictive.

The other one, I think to think about too, he's basically saying we're on pause. And the data's going to be sort of driving that situation going forward. So again, not surprising, but I think you could put maybe May or June back into play with regard to the potential for rate cuts going forward. And the last one, he did still say there's disinflationary impulses still in the pipeline. And so to us that leads to probably a skew that leans more towards potential rate cuts going forward as opposed to rate hikes.

BRIAN HESS: OK. So you're still expecting a series of cuts at some point this year, just maybe pushed back. You want to quantify it? Do you have any kind of sense for how many things--

JACK JANASIEWICZ: And this is something we've been talking about on previous podcasts and in some of our writings. It's simply that I think the market's underappreciating the disinflationary impulses that are still left over. And maybe also over appreciating potential for growth to remain resilient. So put those things together, if we get a little bit of softening on the data front, that growth pullback probably gives treasuries a little bit of a bid. On top of the idea that inflation is probably still going to head towards the 2% target. So against that backdrop, markets are pricing in maybe one and a half rate cuts between now and the end of the year, we would take the over on that. We would say probably more than that.

But again, I'll backload it. Maybe it's a function of, we start cutting in May and June, and then you go every other into the end of the year. But I think there's a little bit of a skew here. And that skew is that the market may be underappreciating the potential for more rate cuts coming in the back half of this year.

BRIAN HESS: And that could create some opportunity for a treasury rally.

JACK JANASIEWICZ: Sure.

BRIAN HESS: I think recently, the treasuries have been signaling to the Fed that maybe it's appropriate to go on hold. As you saw, the curve steepen out. And basically, the middle part of the curve is trading just above where the policy rate is now, allowing for the possibility of a pricing for hikes at some point. If we got into that situation, that is far from our base case. You're not worried about a resurgence of inflation. And so that makes it really hard to imagine the Fed hiking from this hole.

JACK JANASIEWICZ: And I think you could maybe view the price action for January as a microcosm of the bigger picture. You had the inflation concerns. You saw the treasury drift all the way up to almost 480. And then you had the CPI print, which basically triggered the peak in that in treasuries. And we've rallied back since then. So that CPI print came out on a month-on-month basis a lot softer than most people expected at the core level. And I think people took a little bit of comfort in that saying, OK, maybe we're getting a little bit ahead of ourselves and being overly hawkish. Some of that's coming out of the out of the backdrop for rates right now.

BRIAN HESS: Yeah, makes sense. That's exactly the path we've seen. So we have room for optimism on treasuries for the back half of the year. But in the meantime, probably looking for a range trade. Now, we did make an adjustment to our models last week. And I thought maybe we could dig into that a little bit. One of the small trades we did as part of that model adjustment was in duration. So in recognition of your view on rates and the possibility that we could see a rally by the end of the year, we had been underweight duration, which was a good call as we got that push up to 480. We've come back down.

And so we just want to lock in, I think, the profits on that duration underweight. But it wasn't a huge bet. It was 0.15 years or something. So we moved back to neutral, bought some longer term treasuries to reflect that. But there were some other trades that will be more impactful in terms of relative and absolute performance. So the first thing is that we reduced risk kind of across the models overall by bringing down our long standing equity overweight. You want to talk about the reasoning behind the broader risk reduction?

JACK JANASIEWICZ: Yeah, and I think that's the that's the biggest one that hit on. Almost a 4% overweight. And we've been in that, basically, since the end of last year. But I think the idea is simply that, as we ran into the end of the year, we felt like the risk on trade was still appropriate. We start looking at positioning, I think, from a from a leveraged positioning standpoint regarding players like hedge funds, CTAs, we had seen them significantly de-risk going into the beginning of December. So we felt like positioning was a little bit more squared up, if you will.

And from the backdrop of the growth and earnings backdrop, to us, that was still favorable in here. So again, just trying to ride that sort of technical fundamental backdrop, which I think was pairing up pretty well into the end of the year. Thought that made some sense. But as we sort of flip the calendar, that rally had taken place. Time to take a little bit of chips off the table there. And I think a lot of that is just coming back from the idea that we had a little bit of portfolio rebalancing going into the end of the year.

You had people looking to potentially pull back on some of that equity overweight, put money back into the bond market. And as a result, not surprising, you'd expect to see a little bit of that shift reflected in just that asset allocation backdrop.

BRIAN HESS: And so we had been overweight equity. And as part of building that overweight last year, we bought some international stocks. Initially over the summer, we went neutral on emerging markets equities, which we had not been neutral on for quite a long time. That was kind of a scratch trade. They didn't really do much up or down for the rest of the year. The Chinese policy stimulus never really came through. And so it didn't really perform for that second leg. But late in the year, one interesting trade for us was that we bought the EURO STOXX 50 ETF FEZ.

And that almost closed out our international developed equity underweight, and almost made us neutral, US versus international, for the first time in a long while. You want to talk through the life cycle of that trade. It was kind of an interesting one because we were underweight. It got really hurt after the election. Just talk through that.

JACK JANASIEWICZ: Yeah, and I think that's pretty significant, because I think part of our core belief is really, US will consistently outperform Europe longer term. So as we like to say, we'll date international but we'll marry US. And so for us to actually close that underweight to neutral, I think, says a lot in terms of the tactical position that we were thinking about there. But again, it was just a relative catch-up trade, if you will. Europe had significantly underperformed the broader markets, especially compared to the US. You had sort of the tech backdrop really taking control and pushing us equities a lot higher relative to Europe.

And so, to us, that extreme was something maybe worth taking advantage of. Especially again, going into that year end that we were talking about where you're going to get that rebalancing in there. And basically, that's sort of what played out. We had the underperformance in US equities, especially in large cap. And we had the catch-up trade in Europe. And so that trade worked as we sort of planned it to work. And then we're just locking in profits and going back to basically the old underweight Europe, overweight US in here.

BRIAN HESS: So we got that relative outperformance we were looking for, re-establishing our medium term view of underweight--

JACK JANASIEWICZ: And US exceptionalism is probably the right way to characterize that.

BRIAN HESS: Exceptionalism, right. And the same is true in the emerging markets now where we also took the opportunity to lighten up on EM equities, and are back to being underweight that asset class.

JACK JANASIEWICZ: Yep.

BRIAN HESS: Now, one other thing that we did in emerging market stocks, which was a nice little twist, is that we added a new position in an ETF ticker, ILF. That's the iShares Latin America 40 ETF. What's the thesis here? I mean, this is-- I'll just lay it out that it's an ETF that's almost 50% Mexico and Brazil. It has a little sprinkling of other countries. But those two markets mostly.

JACK JANASIEWICZ: Yeah. And I think what happened in the run up to the Trump presidency, you had a lot of rerating of the potential for these tariff concerns and some of that pushback on the geopolitical front there. And so looking at things like the Mex peso, for example, sharply devalued or depreciated over that time period. And again, some of that makes sense. Because if you're starting to price in the potential for tariffs, one of the ways to offset the tariff is for the currency to weaken on that front. And so when you start to think about things like, what's currently priced in at existing levels relative to the geopolitical backdrop or the policies-- in this case, specifically from the Trump administration-- maybe the worst case scenario is already reflected in those current valuations.

And so, you know, you think about what just happened with regard to Trump threatening the 25% tariffs. Claudia Sheinbaum, the President of Mexico, coming back and saying, here's what we're going to do in return. Doing a little bit of the negotiations, a little bit of the concessions. And then you get a broad rally with regard to that. So, again, just thinking about where the market is priced relative to potential outcomes, on top of the idea that maybe you get a little bit of the reshoring, nearshoring, US exceptionalism. And that sort of spills over into the neighbors, right?

Maybe Canada and Mexico are going to be somewhat beneficiaries of a stronger growth backdrop in the US relative to the rest of the world. And so from that perspective, put all these things together, and maybe it's a pretty good time to take advantage of some of the weakness that we've seen more recently in Mexico. And that's basically what we're doing here.

BRIAN HESS: I think it's an interesting trade. Because everybody will acknowledge that Chinese equities are quite attractively valued compared with history. But Mexico and Brazil are looking very similarly and not getting nearly as much attention. So I think it's an interesting play for us to try to take advantage of that. And we'll see how it goes. OK, so I think for our for our last topic today, I wanted to do something a little different. And you've been on the road. I know last week you were traveling. We were trying to communicate back and forth and you were out.

So maybe we could just get some perspectives from the road, what the clients are thinking about. First question would be, what did you get asked about most?

JACK JANASIEWICZ: Yeah, it's sort of our first question right off the bat. It really comes down to some of the potential policies enacted by the Trump administration. And more specifically, the views on tariffs. And I think a lot of people's concerns there are obviously from an inflation perspective. And then you can take that from multiple different ways, whether it be the interest rate policy backdrop from the Fed. What's the treasury market going to do? What are we going to look at for growth? And then ultimately, that brings back to earnings.

And sort of just like we outlined at the beginning of this, it's sort of difficult to handicap that right now. And so you almost, again, have to be more reactionary as opposed to proactive. I mean, we could have a little bit of that US exceptionalism trade. Maybe that's the right way to go about this, which is kind of how we're positioned in the portfolios right now. I'm just saying, the US is probably going to continue to be the better performer here despite all the geopolitical noise out there.

But that was really the number one thing. And it's almost exclusively getting asked, what about tariffs?

BRIAN HESS: That's what everybody wanted to talk about.

JACK JANASIEWICZ: That's all it was. Gets a little tiring after a while.

BRIAN HESS: Yeah, if you do like five meetings a day and it's all of that. Right.

JACK JANASIEWICZ: Exactly.

BRIAN HESS: So how about the sentiment given the uncertainty, has it made people cautious about markets?

JACK JANASIEWICZ: Yeah. That's a great point to bring up, too, because, again, as I had mentioned earlier, when you start to look at some of the de-risking that you had from the leveraged community in December, based on some of the things that we follow, I think the same could be said for investor sentiment as well. They're still very apprehensive to sort of add any more risk into the portfolios. They're comfortable just kind of sitting where they are. And if anything, maybe they're looking to actually de-risk a little bit just because they're nervous about that backdrop.

BRIAN HESS: OK. Yeah, that makes sense. And so given that, were there any products that came up? I mean, for those who don't know, like when we go out for meetings, usually we have a specific-- at least I do-- top product that I tend to talk about models. But it's inevitable, the conversation will kind of circle around to some different things while we're in the meeting. And so I'm curious, what were people looking for this time around?

JACK JANASIEWICZ: Yeah, I think people are sort of trying to get their hands around growth versus value. And some of the other questions that came up as well, but to a lesser extent, what about Mag 7? Well, Mag 7 continued to outperform. And if you sort of look at the earnings expectations between the 493 and the 7, you certainly are going to see them converging by the end of this year, if that's how this thing plays out. And so people are then wondering, OK, well, if that's potentially going to be happening on the horizon, what do you do to take advantage of that?

And so maybe you have a little bit more of a tilt towards value relative to the growth. And then the other side is just, what do you do on the on the right side? And we've been telling investors, you're probably going to earn your carry. So whatever your yield is in the fixed income side of the equation, that's probably what you're going to earn. So there's some talk about still looking at something like an investment-grade bond fund, but even some things that can potentially add a little bit of hedging in there. So the non-traditional bond funds, something like our strat alpha, so to speak, has been coming up.

So a little bit of flexibility. Let the manager sort of move up and down the curve make their plays into the various asset classes within fixed income. Let them be a little bit more active to take advantage of these potential outcomes that maybe have some short-term dislocations in the marketplace.

BRIAN HESS: So still a fixed income focus out there?

JACK JANASIEWICZ: Yeah, it comes rates, tariffs, inflations all rolled up into one.

BRIAN HESS: Yeah, it sure is. All right, well, thank you, Jack. I think we'll leave it there for this month. Let's see what the next month brings in terms of policy. And we'll break it down. Thanks a lot.

JACK JANASIEWICZ: Good.