Stick to an investment plan amid uncertainty
CIO Daily Updates
From the studio
From the studio
Thought of the day
Thought of the day
Global equities fell and the price of oil rose on Thursday as investors weighed ongoing uncertainty in the Middle East. The S&P 500 declined 1.7%, its biggest daily drop since January, and the yield on 10-year US Treasuries rose to the highest level since July last year. Brent crude oil climbed toward USD 110/bbl, and the US dollar strengthened.
Part of those moves initially moderated in early Friday trading as US President Donald Trump pushed back his deadline for Iran to strike a deal or face more attacks by 10 days to 6 April, adding that talks with the Islamic Republic were going “very well.” However, an Iranian official said a US proposal for ending the war was “one-sided and unfair.” The Wall Street Journal also reported that the Pentagon is looking at sending up to 10,000 additional ground troops to the Middle East. At the time of writing, oil prices have resumed their climb, European equity markets have fallen, and S&P 500 futures for Friday's session are trading 0.3% lower.
The future development of the conflict remains uncertain and risks are elevated, but we also continue to believe that investors can navigate current challenges and capture long-term opportunities by staying invested, diversifying, and hedging.
Stay invested and keep a long-term perspective. Past performance is no guarantee of future results. But historical data demonstrate that investors with a longer-term horizon are best served by staying invested, as market timing can be costly. Although intra-year declines are common, stock markets have historically experienced more positive years than negative ones. We also believe the macro backdrop remains benign, and policy support should kick in when growth concerns overtake inflation worries. Despite the latest comments by Federal Reserve officials warning of inflation risks and signaling a near-term hold on its policy stance, we still project lower interest rates by the end of this year. As inflation cools, oil effects stabilize, and growth likely slows toward trend in the second half of 2026, we expect economic conditions will be more conducive to Fed policy easing.
Diversification remains the cornerstone of portfolio management. Statistical analysis of asset class performance shows that no single asset class consistently outperforms across all market cycles, and that a 60:40 equity-bond portfolio has historically been able to reduce risk during market downturns. We think bond markets are currently too focused on the short-term inflationary impact of higher energy prices, and not enough on the potential medium-term negative growth impact, nor on the potential for de-escalation. This, in our view, creates an opportunity to “lock in” elevated short-term interest rate expectations with short-duration quality bonds. Within equities, we believe investors should retain strategic exposure overall, and consider structural growth and defensive segments such as Swiss equities and European health care. Investors willing and able to manage risks associated with alternatives can also consider hedge funds for less-correlated streams of portfolio returns.
Add portfolio hedges to help insulate against drawdowns. We maintain the view that gold remains an effective portfolio hedge, especially if higher energy prices start to trigger concerns about a slowdown in global growth. We also see value in exposure to oil and broad commodities, which help hedge against inflation and serve as a useful portfolio diversifier given their typically low correlation with equities and bonds. Additionally, investors can consider substituting a portion of direct equity exposure with capital preservation strategies for more defensive positions. These instruments can help investors capture most of any potential gains while limiting potential losses, but they also require careful consideration of several factors, including maturity and liquidity.
So, instead of attempting to trade geopolitics, the mixed signals on the outlook of the war reinforce our view that investors should focus on their personal financial objectives and stick to an investment plan. Having a portfolio mix that is right for an investor’s goals and rebalancing throughout the market cycle can help one stay disciplined and avoid the temptation to chase performance or exit the market during periods of stress.