Transcript: Diversification, defensive sectors offer refuge in turbulent times

What drives current U.S. trade policy

CT: A major imbalance in the global economy comes from how the U.S. and China spend and save money. The U.S. spends too much and saves too little, while China saves too much and spends too little. In an ideal world, both countries would adjust their policies to fix this misalignment. The U.S. could cut government spending and reduce its debt, while China could focus on increasing consumer spending instead of relying so heavily on exports and government-driven investments. If done correctly, this would reduce trade imbalances without hurting overall economic growth. China’s growing demand would help absorb more U.S. exports, naturally adjusting trade flows. But making this happen is much easier said than done. China has talked for years about boosting consumer spending, yet most of its economic policies still favour investments and exports. On the other hand, the U.S. is unlikely to cut spending and tighten its budget, especially with the Trump administration pushing for more tax cuts and stimulus measures rather than deficit reduction. In short, while rebalancing trade makes economic sense, politics makes it incredibly difficult.

The Fed’s current stance on interest rates and inflation

CT: The Federal Reserve remains cautious, maintaining its projection of two interest rate cuts in 2025, even as inflation remains slightly elevated. Policymakers are now expecting core PCE inflation at 2.8% by Q4, slightly higher than previous estimates. However, the Fed remains data-dependent, and Chairman Powell has indicated that if tariff-induced inflation proves persistent, rate cuts could be delayed or reduced.

Where the economy is headed in the short term

CT: While the current S&P 500 correction aligns with historical market correction patterns, it doesn’t necessarily indicate a prolonged downturn. Historical market corrections tied to economic slowdowns typically could see equity losses of 25% to 30% before stabilizing. However, stagflationary bear markets tend to recover more slowly. The latest data suggest that while market volatility will persist, the broader economy remains stronger than initial forecasts suggested. Investors should focus on being broadly diversified in defensive sectors such as healthcare, consumer staples, and utilities which have historically outperformed during stagflationary periods.

How investors should position their portfolios

CT: Given the ongoing trade uncertainty and stagflationary pressures, investors should adopt a balanced, risk-managed approach with the following strategies. Favour defensive positioning across consumer staples, healthcare and utilities, which have historically performed well in stagflationary periods. Emphasize quality equities over high growth: Shift exposure toward quality stocks with strong balance sheets, reducing exposure to highly speculative growth names. Ensure that your fixed-income exposure is diversified: De-emphasize credit and focus on high-quality government bonds. Be cautious on cyclical exposure: De-emphasize technology in cyclical sectors, as volatility could persist due to uncertainty over trade policy and economic growth. And lastly, maintain a long-term perspective on your investments and be disciplined throughout this market volatility: Avoid reactionary moves based on short-term volatility. Market corrections tied to trade uncertainty have historically rebounded once policy clarity improves.

Well, those are today’s Soundbites, brought to you by Investment Executive and powered by Canada Life. Our thanks again to Corrado Tiralongo of Canada Life Investment Management. Visit us at investmentexecutive.com, where you can sign up for our a.m. newsletter and never miss another Soundbite. Thanks for listening.

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