The 1% Move Report

Wealth Management — April 10, 2025

• US equities dropped on Thursday, with the S&P 500 falling over 3% and erasing a significant portion of the prior day’s historic rally. The selloff deepened after the White House revealed China tariffs totaled 145%, higher than previously reported, fueling fear that the continuing trade conflict could endanger US exports and key sectors and companies.
• Inflation cooled more than expected in March, with the headline Consumer Price Index rising +2.4% year-over-year from +2.8% year-over-year the month prior. The Treasury curve steepened, pushing front-end yields lower and back-end yields higher, while the US dollar extended its slide, down more than 1% to the lowest since October. The disconnect between long rates and the dollar is emblematic of stagflation, a tough environment for stocks or bonds.
• Non-US equities surged in sympathy with late Wednesday's moves in the US, buoyed by President Trump’s partial tariff pause. Still, skepticism lingers, as investors weigh the impact to corporate earnings, economic growth, and the labor market amid the effective freezing of Chinese trade.

• The GIC recommends preparing for sideways-churning markets, neutralizing portfolio tilts versus benchmarks, and erring on the side of asset class diversification. With megacap and large-cap stocks likely continuing to trump small caps, stay neutral duration in rates and corporate credit, and use real assets and hedge funds to help mitigate emerging risks. The GIC consistently re-assesses its outlook in light of incoming data points.
• Please find more information on the GIC's tactical positioning on the next two pages and reach out to your Morgan Stanley Financial Advisor to discuss portfolio strategies.

US: The recent correction in both the Nasdaq Composite Index and the S&P 500 Index provides some relief to overstretched valuations, while the Federal Reserve's policy pause and the DeepSeek events have cooled the GenAI fever, breaking the bull case. The uncertainty shock to confidence around Trump 2.0's rapid-fire policy agenda is leading to cuts in GDP that could translate through to negative earnings revisions. But a soft landing is still the base case as long as the labor market holds. We are buying equal-weighted indexes, large-cap value and mid-cap growth names.

International Equities (Developed Markets): Recent outperformance has been catalyzed as responses to the “America First” agenda have driven fiscal stimulus and worries about the impact of tariffs is cooling rest-of-world inflation. We view weak currencies as a potential positive for US dollar investors and are likely to upgrade once tariff policy is solidified in Q2.

Emerging Markets: China stimulus, while potentially insufficient to address the challenges of the country's secular bear market, is likely enough to help stabilize the downturn in the short term. The US-China trade conflict under President Trump remains a wildcard, and we expect the “bazooka” of China stimulus may come in light of ongoing trade tensions. Given that valuations in the region are already nondemanding, we are inclined to be patient and wait for recovery.

US Investment Grade: Stronger-than-anticipated economic growth is preserving the strength of corporate cash flows. While interest rates have backed up to reflect “higher-for-longer” expectations, yield spreads have remained well behaved. With geopolitical uncertainty high and equity valuations broadly rich, we like coupons of bonds with index-matching durations.

International Investment Grade: Yields are decent, central banks have begun to cut rates and there is room for spread tightening as economic growth improves.

Inflation-Protected Securities: Real yields have sold off and are now bordering on cheap relative to the past two years. The securities could be a potential buy in a stagflationary environment.

High Yield: We have eliminated our exposure to the equity-like asset class to reduce equity beta of portfolios. High yield bonds rallied aggressively after the unprecedented provision of liquidity from the Fed and fiscal stimulus from Washington. However, we believe there is currently limited upside. Ultra-tight spreads may be the result of increasing competition for capital with private credit financial sponsors and general partners and may not fully reflect adequate compensation for default risk.

REITS: We expect higher stock-bond correlations, which places a premium on the diversification benefits of investing in real assets. Nevertheless, with real interest rates positive and services inflation remaining quite sticky, we would need to be selective in adding to this asset class broadly. We are focused on interesting opportunities aimed at solving the residential housing shortage.

Commodities: Global reflation, tense geopolitics, especially in the Middle East, and ongoing fiscal spending suggest decent upside potential for precious metals and industrial commodities, including energy-related.

MLP/Energy Infrastructure: We previously increased exposure to real assets, with a preference for energy infrastructure and MLPs. Competitive yields and expectations for continued capital discipline amid stable oil and gas prices underpin our decision, as does hedging against geopolitical risks.

Hedged Strategies (Hedge Funds and Managed Futures): We recently added to equity hedged positions noting the pickup in idiosyncratic risk, falling borrowing costs and rising volatility. The current environment appears constructive for hedge fund managers, who are frequently good stock pickers and can use leverage and risk management to potentially amplify returns. We prefer very active and fundamental strategies, especially high quality, low beta, low volatility and absolute return hedge funds.

Market data provided by Bloomberg.

Dow Jones Industrial Average (DJIA): A price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry.

NASDAQ Composite Index: A broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market.

S&P 500 Index: The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.

US Trade-Weighted Dollar Index: A weighted average of the foreign exchange value of the 17US dollar against a subset of the broad index currencies that circulate widely outside the US.