At Sunpointe, we continuously analyze market developments through multiple lenses to provide our clients with nuanced investment perspectives. As part of this process, we recently attended J.P. Morgan’s Chairman of Market and Investment Strategy Michael Cembalest’s presentation, “Chaos vs Grand Design: Trump 2.0 for Investors.” The presentation offers thoughtful context for understanding current market dynamics. We value Cembalest’s deep-thinking strategies and experience with many market and political cycles.
Economic Context and Market Reactions
The first quarter of 2025 delivered a “bumpy ride” for investors, with equity markets experiencing hopeful rise in January based on potential pro-business policies only to experience a 10% correction within the first 50 days of the year. This volatility emerges against a backdrop of:
- An inherited economy with declining inflation expectations and ample liquidity
- U.S. equity valuations that began the year between the 90th and 100th percentiles historically
- A policy environment showing greater emphasis on potentially anti-growth initiatives than markets initially anticipated
This correction, while concerning to many investors, isn’t historically unusual. From 1990-2024
the S&P 500 had an average return of +12.1% in years when the S&P 500 had a maximum price drawdown between -10.0% and -20.0%. For investors, this should give some comfort, but some are still uneasy, and Cembalest attempts to explain why.
Policy Implementation: Intentions vs. Reality
A big concern is the gap between market expectations and policy execution. In Cembalest’s view, the administration was expected to balance pro-growth, productivity-enhancing policies with disruptive policies aimed at bringing back manufacturing to the U.S. using tariffs. While a laudable goal, the latter is being perceived as anti-growth and inflationary. He observes that policy implementation has tilted more toward disruption than markets anticipated, although he doesn’t forecast a recession in 2025.
The administration’s rationale, he explains, for embarking upon a disruptive path is the addressing decades of stagnating US industrial production, particularly since China’s WTO accession, and correcting historical tariff imbalances. Despite assurances that “the tariff gun will always be loaded on the table, but rarely discharged,” tariff implementation has been more aggressive than expected. If “chaos is part of the grand design,” this presents both challenges and opportunities for investors. He believes this deliberate element of uncertainty will likely be reflected through changes in credit spreads and borrowing costs, P/E multiples and valuation metrics, real estate valuations across sectors, and cross-border capital flows and international investments.
Investment Implications: Chaos as Part of the Grand Design
While we agree with Cembalest’s general view, we do not rule out the possibility of a recession; our portfolios are slightly underweight risk. At present, our current investment approach is guided by several key principles:
- Valuation Discipline: With US equity markets beginning the year at historically elevated valuations, we see global ex-US markets as stubbornly cheap for the past few years and potentially attractively valued. We maintain a focus on identifying these relative value opportunities across asset classes and geographies through active management.
- Policy Impact Assessment: We continuously evaluate how economic, trade, and regulatory policies affect different sectors and geographies, which may impact client portfolios.
- Volatility Management: Recognizing that chaos may be a deliberate element of policy design, we’re implementing strategies that can potentially benefit from market dislocations while managing downside risk. This includes more frequent portfolio rebalancing to capitalize on volatility and tax-loss harvesting for taxable accounts to enhance after-tax returns during market fluctuations.
- Long-Term Orientation: Despite near-term volatility, we maintain our commitment to long-term strategic positioning that aligns with client objectives.
Looking Forward
The Sunpointe Investment Committee meets regularly to assess these developments and their implications for client portfolios. Understanding that elevated starting valuations create less room for policy error, we’re positioned more defensively than usual while maintaining exposure to areas that may benefit from specific policy initiatives. Our approach balances caution with strategic opportunism as the complex market environment unfolds.
If you’d like to discuss how these insights relate to your specific financial situation and investment strategy, please contact your Sunpointe advisor. We welcome the opportunity to explain how we’re navigating these challenging market conditions on your behalf.
