A paradigm shift in policy and markets

Liberation Day marked a turning point for markets—one defined by sharp volatility, deepening investor anxiety, and the realization that traditional policy guardrails may no longer apply. Investors were forced to confront the real-world implications of President Trump’s tariff policy. In the span of 48 hours, a policy shock transformed into a global market event. China responded almost immediately with retaliatory measures, and what followed was a sharp repricing of risk across asset classes, reflecting fears of a negative feedback loop that could tip the global economy into a recession. Since then, the administration has announced a three-month delay in implementing the reciprocal rate structure while going ahead with the baseline 10% tariff for most countries, although certain sector-specific tariffs remain. However, the trade confrontation with China continues to escalate, confirming market fears that a broader trade dispute between these two economic powerhouses is now fully under way.

In our view, the policy changes announced by the Trump administration aren’t a cyclical adjustment—they represent a structural pivot, with the global economy facing its most dramatic macroeconomic and geopolitical realignment since the 1930s. We believe a policy shift of these historic proportions has the potential to unravel the system that the United States spent decades building in the aftermath of World War II, with wide-ranging implications.

"As we’ve seen from the market whiplash in the first two weeks of April, the result is a risk environment that’s structurally asymmetric and tactically unpredictable."

Uncertainty is the risk

Perhaps as unsettling as the scale is the ambiguity: The stated rationale behind the tariff policy, aimed at correcting trade imbalances, deviates from conventional economic orthodoxy, instead reflecting a protectionist approach in which trade deficits are equated with economic vulnerability. The back and forth around key policies and abrupt reversals—such as the recent delay of the reciprocal tariff structure—make it difficult for companies and investors to adjust with confidence as the future policy landscape remains highly uncertain. As markets reeled, the absence of a clear response from policymakers only compounded the uncertainty.

For equity investors, the current moment is particularly challenging. The binary nature of the policy outlook—where tariffs could be reversed or become entrenched—creates a dilemma. Panic selling risks missing a rapid rebound, while holding on assumes a rational resolution that has yet to materialize. As we’ve seen from the market whiplash in the first two weeks of April, the result is a risk environment that’s structurally asymmetric and tactically unpredictable.

More broadly, the market is grappling less with the first-order impacts of tariffs—which will take time to work through—and more with the corrosive effects of sustained uncertainty. And yet, despite a surge in the U.S. Economic Policy Uncertainty Index to levels last seen during the pandemic and a clear deterioration in sentiment and risk appetite in Q1 2025, the correction in equity markets has only been modest given the previous run-up in valuations. Even though the recent sell-off suggests elevated uncertainty should be priced in, equities remain expensive by most historical measures.

Economic uncertainty is now more damaging in the near term than the tariffs themselves, which will take time to fully affect supply chains and corporate margins. Without a clear sense of the U.S. administration’s end game, investors are left to navigate a landscape defined less by data and more by the absence of a coherent framework.

The Fed’s bind

In our opinion, the U.S. Federal Reserve (Fed) faces an increasingly difficult path forward. With the high inflation from 2022 still fresh in its memory, the Fed will likely be reluctant to describe inflation as being transitory again and move quickly to cut rates even as recession risks rise. The administration’s quick policy reversals may also stay the Fed’s hand, as it won’t want to preemptively cut rates only to realize that the policy outlook has shifted again. That said, should the tariffs persist and the economy soften materially, the policy response may need to be deeper and more prolonged than markets currently anticipate. We believe this dynamic—where cuts are delayed but are ultimately more aggressive—could create opportunities in the middle of the yield curve.

Beyond the United States, central banks globally are navigating similarly fraught territory. The economic spillovers from U.S. tariffs will vary depending on direct exposure, retaliatory measures, fiscal space, and currency resilience; however, the broader picture is one of rising global downside risk. Weaker U.S. growth and softening demand in China could tip the global economy into a synchronized downturn—affecting small, open economies such as the United Kingdom and Australia, where the direct tariff hit may be modest, but the second-order effects could be severe.

Monetary authorities in these regions are taking note. The Bank of England (BoE), Bank of Canada (BoC), and Reserve Bank of Australia (RBA) have all struck a more cautious tone, acknowledging the stagflationary threat posed by global trade tensions. Even so, the market has continued to price in a series of rate cuts through year end—three each from the BoC and RBA and up to five from the BoE—as these central banks move policy to their neutral estimates. Still, with inflation risks lingering, room to cut deeply into accommodative territory remains limited.

As a result, policy responses will be uneven, sentiment driven, and often behind the curve. For investors, the interplay between policy constraints and global fragility demands a high degree of vigilance and tactical flexibility.

"What if the policies designed to shrink trade deficits also shrink the very capital inflows that finance them?"

Global dominoes

The international response to U.S. tariffs will be critical, not only in terms of retaliation, but also in how it reshapes global capital flows and economic alignments. If higher barriers to trade result in the United States importing less, other countries will accumulate fewer dollars, limiting their ability to reinvest in U.S. assets. As countries such as Germany move toward greater defense autonomy and infrastructure investment, they’ll likely need to retain more capital domestically to support rising debt issuance. If this were to happen, it would mark a sharp reversal from a multidecade trend of global capital chasing U.S. yield and safety.

Historically, strong foreign demand for U.S. assets has supported a premium in American markets, even as the United States has taken an outsize share of global capital relative to its contribution to earnings. But signs of that premium beginning to unwind have already begun to emerge, raising important questions about the sustainability of current capital flows. What if the policies designed to shrink trade deficits also shrink the very capital inflows that finance them? It remains unclear whether the administration is weighing this risk—balancing tariff revenue against the potential for higher funding costs and reduced global demand for U.S. financial assets.

In parallel, traditional safe havens are seeing renewed interest. Gold continues to trade as a consensus hedge, although positioning is increasingly crowded and vulnerable to sentiment shifts. The Japanese yen, by contrast, remains in our view fundamentally undervalued and stands out as one of the few assets that offers both defensive characteristics and valuation support.

Funding market stress and the “Trump put”

While risk assets have faced pressure from tariffs and geopolitical volatility, a less visible but equally important shift has emerged in funding markets. On April 7, the U.S. Treasury market experienced a sharp sell-off, with 10-year yields surging by 17 basis points in a single day, the most significant intraday move in two decades and unusual as it occurred during a sell-off in equity and credit markets.¹ U.S. Treasuries failed to provide protection. The forced selling and emerging liquidity pressures echo the dynamics of March 2020, when market functioning deteriorated sharply amid unwinds of highly levered basis positions,³ ultimately prompting the Fed to intervene with $1.6 trillion in Treasury purchases to restore stability.

While it appears to us that the Trump administration is more tolerant to equity sell-offs than previously assumed, it’s shown greater sensitivity when stress emerges in the plumbing of financial markets. Just days after rolling out the reciprocal tariff structure, President Trump unexpectedly announced a 90-day pause—a potential response not to falling stock prices, but to growing dysfunction in funding markets. The “Trump put"² may still be in play, but the key factor that would convince the administration to act may have more to do with the costs of funding levels and not that of the S&P 500 Index.

Final thoughts: positioning through complexity

Even after the recent sell-off, we believe markets remain broadly expensive, particularly within U.S. equities, where valuations continue to reflect optimism that may not be aligned with rising macro and policy uncertainty. Credit markets also appear stretched, with spreads—particularly high-yield spreads—only recently beginning to price in the potential for a broader economic slowdown or policy missteps. In this context, we remain sharply focused on managing exposures and avoiding areas of concentrated tail risk.

In the current environment, our focus is to prudently manage risk and maintain a flexible, tactical approach. While elevated uncertainty has naturally tempered our conviction and therefore the extent to which we’re willing to take on risks, we remain prepared to act when high-conviction opportunities emerge. Market dislocations will create openings, but capitalizing on them will require careful attention to portfolio construction, timing, and sentiment. This isn’t a backdrop that favors sweeping macro views or static positioning; rather, it calls for adaptability, thoughtful execution, and a willingness to reassess as conditions evolve. 

Our mandate remains unchanged: to deliver alpha, or market-beating returns, especially in challenging market environments. That means preserving capital, managing risk with discipline, and being ready to act decisively when the opportunity set warrants it. We draw confidence from our experience and our process, built over three decades of navigating complex market cycles. And in today’s landscape, confidence must be paired with humility because certainty is increasingly in short supply.

1 Bloomberg, as of 4/11/25. 2 The “Trump put” refers to market expectations that the Trump administration would tap into every option available to support stock prices. 3 Basis trade refers to a trading strategy, typically deployed by a hedge fund, that seeks to profit from the difference in price between a U.S. Treasury security and a U.S. Treasury futures contract.