Courtesy NBT Bank
by Kenneth J. Entenmann, CFA®
4/10/2025
It is said that the markets hate “uncertainty.” Well, we have much uncertainty. The Trump administration has created great confusion as to the end game of the tariff wars.
Is the purpose of tariffs to raise “billions and billions” to help reset our “unsustainable” fiscal debt and deficits? If that is the case, the tariffs will need to be permanent.
On the other hand, the administration is busy telling us that over 70 countries have approached the White House to “negotiate” new trade deals. Hopefully, that will be the case, as the world will have more free and fair trade, which is a good thing. However, it also means the tariffs and the “billions and billions” are temporary.
Which is it? Are the tariffs a permanent income stream or a tool for negotiation? Adding to the confusion is that the answer you get depends on which administration official is speaking.
Trade Advisor Peter Navarro and Secretary of Commerce Howard Lutnick are adamant that the tariffs are permanent. National Economic Advisor Kevin Hassett and Sec. of Treasury Scott Bessent are clearly in the negotiation camp (As am I.) And the President has demonstrated an ability to make both cases at the same time. Confused? Me too. And so are the markets!
The markets have responded harshly to the inconsistent roll-out of the Trump tariffs. The S&P 500 has been down 11.54 percent in the last five trading days, 13.65 percent in the previous month, and 15.28 percent year-to-date. The market is speaking loudly. But maintaining a long-term view is helpful. Even after the recent carnage, the S&P 500 is up 5.15 percent annually over the last three years, 14.37 percent annually over the last fiveyears, and 11.09 percent annually over the last ten years. That’s pretty good! Especially when compared to the “safe” three-year, five-year, and ten-year bond aggregate returns of .94 percent, -.61 percent and 1.35 percent! Yes, diversification still works!
Over the last few years, I wish I had counted the number of times people told me that the classic 60 percent Equity/40 percent Fixed income portfolio was dead. Diversification was a failed strategy. Technology was the place to be. Why diversify when everyone knows the AI phenomenon is going to dominate the world? International stocks have underperformed the U.S. stock market for 10 years. Why bother? And worst of all, why own fixed income with its paltry low yields?! Just level up and buy the “Magnificent Seven.”
Well, as the saying goes, stuff happens. Today, the uncertain end game of the trade wars and the recession risks are real concerns. And suddenly, diversification is once again proving to be a time-tested way to protect wealth.
As of April 8th, the return of our NBT Select 60/40 strategy is -4.66 percent vs. the -15.28 percent return for the S&P 500. Interestingly, our fully diversified NBT Select portfolio outperforms a basic 60 percent S&P 500/40 percent Aggregate Bond portfolio. Year-to-date, our return of -4.66 percent compares very favorably to the basic portfolio return of -8.22 percent.
What is generating the outperformance over the basic portfolio? Developed and Emerging Market International stocks are significantly outperforming U.S. stocks. Other asset classes like Real Estate, Infrastructure and Natural Resources are also providing outperforming diversification.
I wish I could tell you that this outperformance was due to our brilliant market-timing capabilities. Boringly, it is our long-term commitment to proper risk management, something that gets bashed in go-go markets like the last two years. It is in times like these that diversification matters. While I hate negative returns, a low, single-digit return in the short run is hardly catastrophic for long-term investors.
For better or worse, we should be getting some clarity on the uncertain trade war in the coming weeks. If the tariffs are permanent, the market will adjust, as they already are. If a grand reset of freer and fair global trade is achieved, then the markets will also react, my guess , very positively. But, while we await clarity, the markets will remain incredibly volatile. The best defense in a volatile market is diversification. Being boring has its virtues!