It can be difficult for investors to cope with the huge swings in the US stock market. For many, the temptation is to move everything to cash and wait for the dust to settle. But Donald Trump has been voted in for four years and he’s not done yet.
We heard from American Century Investments this week, a US-based fund manager that manages over $260 billion in assets, most of it in the American market. They don’t have the option to take everything to cash. But they did have some good advice for investors in US stocks.
Is policy uncertainty driving this market volatility?
The market doesn’t react to uncertainty uniformly and the source of uncertainty could impact forecasts of market volatility, according to Rich Weiss, chief investment officer of multi-asset strategies for American Century.
“Although market volatility has been present over the past year, it’s important to clarify that economic uncertainty rather than policy changes has driven these movements. There is strong evidence that markets will likely ignore all policy announcements unless there is a clear connection to economic growth or corporate profits.”
The possibility of additional tariffs continues to suggest multiple outcomes. Trump’s tariff policy also poses a near-term threat to inflation, the domestic economy and global growth. Tariffs likely will affect corporate revenue outlooks and economic growth rates, particularly in the short term.
But this is also creating potential opportunities for investors in US stocks. American Century expects the Trump administration to use tariffs as negotiating tools to secure favourable trade deals, security provisions and other agreements for the US. Implementing tariffs will also provide a means for the administration to raise revenues to help pay for tax cuts.
- Markets meander as tariff letter wait goes on
- Donald Trump’s Big Beautiful Inflation Bomb
- Companies Reporting: Vistry, Trade deals and UK GDP
Ultimately, the fund managers say they hold “moderating perspectives.” Their view is that though tariffs and trade have captured headlines in the new year, no nation can completely isolate itself and thrive with domestic production alone. “We believe this view will eventually prevail,” said Patricia Ribeiro, who is co-chief investment officer for global growth equity at American Century.
Some market observers believe the financial markets remain blindly optimistic and oblivious to mounting risks, particularly from tariffs. Others carefully digest all the commotion, believing the eventual outcome will likely be benign. American Century says it is gradually moving toward the more measured latter view.
What to expect from DOGE and the Fed
One caution against “blind optimism” is the work of the Department of Government Efficiency (DOGE). US government spending has been a key driver of economic growth over the last few years. Furthermore, alongside health care, government employment was a major component of job gains over the same period. So, if DOGE curtails expenditures and government headcount, growth could slow, and the labor market could weaken, American Century warned investors this week.
Federal government spending has been a significant component of US gross domestic product in recent years. Accordingly, DOGE-related spending cuts could pressure the nation’s GDP.
The Federal Reserve is preparing for this uncertainty by giving itself “maximum flexibility.” Although expecting an interest rate cut of half a point this year, American Century forecasts the number could in fact double.
“Fed officials appear committed to a cautious, wait-and-see approach that affords the central bank maximum flexibility. The pace of the economy’s slowdown and the magnitude of DOGE spending cuts will likely influence the Fed’s strategy,” said Charles Tan, who heads up fixed income at American Century.
Similarly, American Century expects at least two more rate cuts later this year but cautions this could change: If trade policy and government spending disruptions trigger a sharp slowdown in growth, proving the pause was a mistake, the Fed may ease more aggressively.
What to do in the current environment
While advising patience and staying the course, American Century highlighted ways for investors to look for opportunities within this uncertainty.
A bottom up approach may work better in this environment, with a focus on individual securities rather than betting on the direction of policy, especially from the White House, which has become very unpredictable.
In an uncertain environment, when the overall market may become more challenging, bottom-up stock selection assumes even greater importance. Fundamental analysis can help identify growth drivers and the specific companies benefiting from these forces.
In this environment, high-quality businesses with agile management teams will likely fare better. Investing in well-managed, competitively advantaged companies that can sustain growth and profitability may offer the best strategy for dealing with market uncertainties.
We haven’t seen a market this concentrated since the dot-com bubble. History shows that periods of volatility that tend to follow extreme market concentration can lead to outperformance for overlooked asset classes as well.
