In recent months, shifts in US policy have had rippling effects upon a changing world order. Among these shifts are (1) a reset of the global trade system through US tariff policy; (2) uncertainty over the role the US will play in international security and military aid; (3) immigration policy, and (4) reshaping the US federal government. Any one of these shifts alone could impact corporate earnings and, in turn, impact financial markets. However, the reaction to tariffs appears to be playing a leading role.
Since the announcement of new tariffs on April 2, 2025, US equities turned sharply lower with multiple indexes reaching bear market territory. The Volatility Index (VIX), which tracks the market’s expectation of volatility, more than tripled at one point. Several stocks (some previously referred to as the “Magnificent Seven”) declined over 30%. The volatility has created a platform for some to prognosticate what the future will hold. With a heightened level of stress and anxiety, it is not surprising that many predictions are negative. That said, there are legitimate risks in play.
This is not the first time a catalyst has sparked a market sell off. Throughout each sell off, several common themes tend to appear. These principles form the basis of EBS’ investment philosophy and have allowed our team to maintain a disciplined approach through the storms over the past three decades.
- The Future Cannot Be Reliability Predicted, Especially In An Uncertain Environment. There is no value in speculation. Analysts and commentators make scores of predictions that often ultimately turn out to be wrong. The current tariff issue is equally fluid and no one knows what the eventual outcome will be. This is particularly true in an environment where news of tariff policy has changed day to day, sometimes hour by hour. In the absence of reliable projections, we must look to other factors.
- Quality and Valuation Matter. In our view, owning quality businesses with strong balance sheets at attractive price-to-value relationships, on average, is key to long-term success. Although valuations may change with evolving economic or geopolitical conditions, quality companies that are reasonably priced tend to fare well on average when a catalyst places downward pressure on markets. A primary goal is to manage downside risk or, in other words, avoid permanently losing money.
- Volatility Creates Opportunity. After two years of gains, valuations in segments of the equity markets were on the expensive side. The recent volatility has helped improve price-to-value relationships, causing some quality companies to again become attractive, in our view. A reduction in valuations can create an opportunity to add to existing positions or initiate positions in new companies, which can set the stage for compounding over the next 5-7 years.
- The US Remains Attractive. Despite potential tensions arising from shifts in policy, we believe the US will likely continue to be an appealing venue to deploy capital. The US has (a) rule of law, (b) low energy costs, (c) a great transportation network, (d) deep capital markets, and (e) world class innovation.
- Discipline is Critical. Markets are cyclical and periodically swing from euphoric to depressed. Market volatility sometimes triggers a sell response, but, in our view, the best investment opportunities may arise when others are fearful. Members of the EBS team have been through numerous market cycles, like the ’87 market crash, Long-Term Capital Management blow up (’98), technology bubble (’00), financial debacle (’08 / ’09) and Covid (’20). Investing is a math equation periodically interrupted by bouts of human emotion – sometimes euphoric, sometimes depressed. EBS’ time-tested investment process will guide us through the current period, just like it has for more than three decades.
Investors have long benefited from the cost efficiencies of globalization. It appears we are now entering a period of fragmentation focused on domestic production. Although there are benefits to an increase in domestic production, it may come at an inflationary cost to companies and consumers alike. In an environment where tides are no longer rising all ships, a sound investment process will be vital. EBS is here to help guide you.
Disclosure – The information presented is for educational purposes and should not be construed as investment advice or a recommendation of any particular security, strategy or investment. Past performance is not indicative of future results, and historical trends may not continue in the future. The
information provided is from sources believed to be reliable, but its accuracy is not guaranteed. All investments involve risk, including the potential loss of principal. Investors are encouraged to consider their financial situation and consult with a financial advisor before making investment decisions
