The first half
of 2025 has seen rapid and often unpredictable
policy changes, which have left many investors feeling uncertain.
We believe these uncertainties
will be in play for the next few months, if not longer.
Even if countries negotiate lower tariffs with the US, the tariffs that remain
should still produce a spike in inflation and then an economic slowdown.
But we think the U.S.
economy will avoid a recession with a cushion
from Federal Reserve interest-rate cuts, tax relief, and deregulation.
In fact, we're looking for these positives to help fuel a mild economic recovery
towards the end of 2025 and into 2026.
The prospect of a slowdown, followed by a recovery presents an opportunity
for long-term investors to consider increasing positions in high quality U.S.
asset classes and sectors, specifically U.S.
large- and mid-cap equities.
We view companies with historically strong balance sheets, good cash flow,
low debt, and long-term growth prospects as well equipped to confront
the economic impact of tariffs.
Investors also may want to position long-term portfolios for future
economic expansion potential.
At the sector level, we believe investors should consider increasing exposure
to the Information Technology, Communication Services, Financials, Energy,
and Utilities sectors. We prefer building exposure incrementally
if market drawdowns create buying opportunities as we expect.
Quality is also our theme in fixed income.
We recommend investors
be selective and focus on investment- grade corporate bonds and municipal bonds.
We favor maturities of 3 to 7 years, an intermediate range
because we expect similar yields, but much less price and yield volatility
than from longer-dated maturities. In real assets,
we favor a broad allocation of commodities that gives exposure to precious metals
during times of policy stress, but also adds energy and industrial
commodities to prepare for the economic recovery we expect.
Finally, for qualified investors, we believe adding alternative strategies
to a portfolio of stocks and bonds may help build a more resilient portfolio
better able to withstand periods of market volatility.
For more of our insights and guidance for the rest of the year and beyond,
read our special report 2025 Midyear Outlook: Opportunities amid uneven terrain.