Our Response to Economic Policy Uncertainty

In WestEnd Capital’s Fourth Quarter 2024 client letter, we wrote the following:

According to markets, the administration is misplaying its hand on trade.  

For the stock market, the story is not necessarily about the size of the tariffs or their economic impact. It is more about the economic and trade policy uncertainty, driven by the on-again, off-again, on-again nature of tariff pronouncements. Rising policy uncertainty has corresponded with rising market volatility.

History reminds us not to reflexively assume the worst, however. During President Trump's first term, the S&P 500 experienced an overall decline of 5% on days when the U.S. announced new tariffs (in 2018 and 2019), and the index dropped even further, totaling a 7% decline, on days when other countries announced retaliatory tariffs. The volatility we are seeing today seems to be consistent with fluctuations from that period.

The pattern from President Trump’s first term was that tariffs were suddenly announced, countries retaliated, volatility went up, talks were held, deals were made, the uncertainty faded, and markets rebounded. In fairness, however, Trump appears to be more emboldened this time around, and there is not much clarity on what the end game looks like.

Looking ahead, tariffs may become more permanent, which could hit economic growth but potentially be offset by pro-growth policies like tax cuts and deregulation. The Trump administration could also pull back on tariff policy as the downside risks become more acute, which we think would factor as a positive surprise for markets. There is no way to know for sure. But we see many scenarios where the outcomes could be better-than-expected, and we think markets would run on that news.

We’ll have capital ready to deploy.