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What happened?
Tuesday's initial sharp gains for the S&P 500 on hopes of tariff progress abruptly evaporated later in the session after it became clear the Trump administration would push ahead with punishing new tariffs on virtually all imports. At one stage, the index was as much as 4% higher on Tuesday, putting it on track for its largest one-day gain since 2022, before ultimately closing down by 1.6%.

With President Trump's reciprocal tariffs taking effect just after midnight Eastern Standard Time, including a 104% rate on some Chinese goods, pressure on risk assets has ratcheted up. Japan's TOPIX index fell 3.4% on Wednesday and South Korea's KOSPI was off 1.7%. The Euro Stoxx 50 is down 2.4% at the time of writing and S&P 500 futures point to a flat US open. Oil prices are down around 3%, on track for the worst five-session drop since 2022.

Headlines remain challenging. President Trump in the last few hours accused China of manipulating its currency while predicting Beijing would seek to cut a deal. The USDCNY rose to 7.35, bringing its month-to-date gains to 1.3% for the yuan's weakest close since December 2007. Trump also reiterated plans to soon levy tariffs on pharmaceuticals.

The historically large equity market swings at the start of this week follow a 10% fall in the S&P 500 in the two trading sessions following the President’s 2 April announcement. The rebound early in Tuesday’s session may also have been partly driven by technical factors, as equities had become significantly oversold following recent sharp declines.

What do we think?
Markets are likely to stay volatile in the weeks ahead as investor focus shifts between changing interpretations of the Trump administration’s goals.

Our base case remains that after an initial phase in which tariffs rise further, US effective tariff rates should start to come down from the third quarter of the year as legal, business, and political pressure mounts, and as deals with individual countries and industries are struck. We also expect the Federal Reserve to cut interest rates by 75-100 basis points to support the US economy. In this scenario, we believe the S&P 500 can recover to 5,800 by year-end.

However, investors should prepare for additional near-term stock declines. We do not believe the S&P 500 is currently priced for much beyond a mild recession (a drop to 3,500-4,500 would be more consistent with historical recessions, in our view). And while an about-face from the Trump administration or court injunctions can’t be ruled out, in the near term we think it is more likely that news flow will continue to worsen, including potential EU retaliation and an end to exemptions on pharmaceuticals and semiconductors.

Even though the market may move even lower in the near term, periods of market stress have historically and consistently offered long-term rewards for diversified investors who look through near-term volatility, stay the course, or put fresh money to work.

Since 1900, a diversified portfolio has outperformed inflation by an average of 5.1% per year and outperformed cash by 4.6% per year (according to the Global Investment Returns Yearbook). History also shows that investors with excess cash would have benefited from putting it to work in a balanced portfolio, even when stocks are in the middle of a drawdown. Since 1945, a strategy to phase into a balanced 60/40 portfolio of S&P 500 and US government bonds over the course of 12 months and then holding has outperformed cash (3-month Treasury bills) in roughly 74% of 1-year periods and around 83% of 3-year periods. Strategies that started to phase in to diversified portfolios when the S&P 500 is more than 20% below its peak outperformed cash in roughly 87% of 1-year periods and almost all 3-year periods. ( Click here to read more on phasing into markets.)

What should investors do?
At times of heightened uncertainty and elevated volatility, there are broadly three strategies investors can pursue:

• Manage volatility. For investors concerned about the near-term risks and looking to hedge portfolios against potential further declines.
• Take advantage of volatility. For investors unsure about the near term, but looking to utilize high levels of volatility to earn additional portfolio income.
• Look through volatility: For investors who were under-invested going into the sell-off or are willing to take on near-term risk for potential long-term reward.

We believe that there are ample opportunities for investors to pursue all three, enabling them to use current volatility to build stronger portfolios for the future.

Managing volatility
Capital preservation. High levels of implied volatility mean that hedging against market declines is no longer “cheap” to implement, but the potential range of outcomes is wide and strategies with a degree of capital preservation can be an effective way for investors to manage potential risks to portfolios that could materialize if markets begin to price a deeper US recession.

Manage political risk with gold. Gold prices have been under pressure since “Liberation Day,” but this is not altogether surprising, as during periods of extreme market stress investors sometimes use the metal to meet margin calls. We believe the sell-off offers a good opportunity for investors looking to build exposure to an asset that we believe will continue to offer portfolio diversification benefits, particularly in adverse scenarios. In our base case, we target gold prices of USD 3,200/oz.

Seek durable income in quality bonds. Volatility in 10-year US Treasury yields means they now stand at 4.36%, compared to our year-end target of 4.0%. This anticipated bond rally should offer respectable total return potential and diversification benefits for portfolios. In a downside scenario we would expect 10-year Treasury yields to fall to 2.5%, offering potentially significant capital gains for investors. Investors at the longer-end of the yield curve need to remain mindful of volatility related to fiscal concerns and the unwinding of technical hedge fund "basis trades."

Diversify with hedge funds. By dynamically adapting to macro shifts, hedge fund strategies like discretionary macro, equity market neutral, select relative-value or multi-strategy can cushion portfolios in down markets. We believe that the alpha orientation and conservative posture of multi strategy funds will mean near-term performance is likely to be largely insulated from market volatility. Similarly, we expect that macro strategies will have generated positive outcomes amid the volatility.

Taking advantage of volatility
Trade the range in currencies. In the near term, we see an opportunity to benefit from currently elevated levels of currency volatility by trading what we expect to be near-term ranges in key pairs, including EURUSD (centered around 1.10), USDCHF (centered around 0.86), and GBPUSD (centered around 1.31).

Over the medium term, we believe a more sustained period weakness for the US dollar is likely, particularly if the Fed cuts interest rates more quickly than expected in response to weakness in US economic growth. Investors looking to position for longer-term dollar weakness while monetizing short-term volatility can consider selling the risk of a higher US dollar.

Looking through volatility
Periods of volatility can offer opportunities for longer-term investors to use more favorable prices to strengthen their overall portfolios.

Equities
We hold a Neutral tactical stance on equities, including on the US, Europe, and China, and the potential range of outcomes is wide.

However, we note that periods of market stress have historically and consistently offered long-term rewards for diversified investors who look through near-term volatility and stay the course or put fresh money to work.

At 4,915 points, the S&P 500 would officially enter a bear market, down 20% from its peak. Analyzing the 12 occasions when the S&P 500 has fallen by 20% from its peak since 1945, the index has delivered a positive subsequent one-year return on 67% of occasions, with a mean return of 12.9%. Over a three-year horizon, this rises to 91% of occasions with a mean return of 29.2%.

We continue to see opportunity in the Transformational Innovation Opportunities of AI, Longevity, and Power and resources.

High yield credit
While we believe it is still premature to buy the dip in riskier credit, we believe the dislocations in credit markets have made spreads significantly more attractive, and we note that US high yield credit spreads have historically not remained above 500bps for extended periods. We also note that absolute yields of more than 10% for many US high yield issuers may lead to concerns about financial distress and compel the Fed to act, providing a potential catalyst for the asset class. For now, we focus on select BB rated issuers we consider to be rising star candidates, as well as select subordinated/hybrid bonds.