2025 Multi-Asset Strategies Outlook
Second Quarter
Key Takeaways
The market may shrug off proposed policies that are perceived as negotiating tactics, or that don’t impact growth or profits directly.
The market's March tariff tantrum demonstrates that investors will react when tariffs are actually applied and threaten the economy.
Understanding When Uncertainty Leads to Market Volatility
You’ve undoubtedly been inundated with talk about policy uncertainty and market volatility. Not so fast! I think clarifying when and why uncertainty doesn’t always equal market volatility is important.
Yes, uncertainty is anathema to financial markets. But note that despite daily headlines about dramatic policy proposals, the stock market didn't tank immediately after the election.
Figure 1 shows the sharp disconnect between a widely used metric of policy uncertainty and U.S. stock market volatility, as measured by the CBOE Volatility Index (VIX), through January, the latest period for which data are available. Despite the media’s myopic focus on policy uncertainty, the market actually rose through mid-February, while VIX hung around its longer-term normal level until those policies began to actively threaten economic and corporate earnings growth.
Figure 1 | Disconnect Between Policy Uncertainty and Market Volatility
VIX Index vs. Global Economic Policy Uncertainty (EPU) Index
Data from 1/31/1997 – 1/31/2025. Source: FactSet.
Of course, policy uncertainty, in this case, was overplayed. Most of the policies President Donald Trump has announced so far are laid out clearly in the Heritage Foundation’s Project 2025. If it’s not included in the Project 2025 document, we are likely seeing a return to policies from the first Trump administration. Tariffs exemplify one of Trump's most lasting policies, tracing back to his first presidential campaign.
How Economic Factors Can Influence Market Volatility
Although market volatility has been present over the past year, it's important to clarify that economic uncertainty rather than policy changes have driven these movements. For example, in August 2024, stocks fell sharply because investors feared an economic hard landing. Then, in December, stocks slid as still-sticky inflation caused a reassessment of expectations for Federal Reserve (Fed) rate cuts. And in January, leading tech stocks sold off sharply amid questions about the fundamentals of the artificial intelligence (AI) trade.
There is strong evidence that markets will likely ignore all policy announcements unless there is a clear connection to economic growth or corporate profits. So, markets can shrug off tariff talk if it’s perceived as a negotiating tactic or short-term ploy. In contrast, actual tariffs diligently applied over time that threaten economic growth and higher inflation would cause a market reaction.
This explains the March tariff tantrum — the big market reaction when Trump made clear that tariffs would take effect on Canadian, Mexican and Chinese imports to the U.S. This is one of several Trump policies that could potentially raise prices across the economy while also hindering growth, depending on their implementation and duration. That’s precisely why we argue that the market focuses on the real economic impacts rather than the hypothetical possibilities of these policies.
The Importance of Diversification for Long-Term Success
Markets often don’t respond to every tweet or fleeting policy idea, and there’s good reason for that! You probably already have a carefully crafted long-term financial plan that aligns with your goals, risk tolerance and time horizon. The latest headlines shouldn’t influence these plans and goals.
We believe the prudent approach is sticking to your long-term financial targets regardless of the latest tweet storm. But if you absolutely have to do something, then rebalancing to your desired allocations is a way to satisfy that need. Rebalancing forces you to systematically sell high and buy low over time. If you’ve been applying that strategy, then in recent years you’ve been selling U.S. mega-cap stocks and buying more non-U.S., small-cap, and value-oriented shares on the margin.
To clarify, I'm not suggesting immediately selling large-cap stocks. We think the current momentum and short-term economic fundamentals appear favorable. However, it may be wise to ensure that your portfolio's allocations to bonds and other overlooked asset classes align with your long-term investment strategy.
Asset Class
U.S. Equity | U.S. Fixed Income & Cash
For some time now, we’ve argued that financial markets are at the intersection of historically high uncertainty and valuations. Instead of adding risk, we believe the best approach is to take profits from overvalued segments and add to relatively unloved ones, rebalancing portfolios toward predetermined, long-term asset allocation targets.
Equity Region
U.S. | Developed Markets
We’ve experienced a sharp momentum reversal in the last month or so, and as a result, sentiment indicators now favor European and other non-U.S. equities over U.S. stocks. However, our model favors the U.S. overall for fundamental reasons. Domestic companies enjoy stronger forward earnings projections, the U.S. economy is producing better relative growth and long-term U.S. bond yields are declining.
U.S. | Emerging Markets
Emerging markets (EM) equities are such a broad, diverse asset class that we are delighted to have experienced managers actively analyzing and selecting stocks for our portfolios. Tariffs generally complicate the outlook for growth and corporate profits, muddying the outlook for the overall asset class. Of course, not all companies will be affected or respond equally. We believe our managers are well-suited to capture this competitive differentiation.
U.S. Equity Size & Style
Large Cap | Small Cap
One area where the theme of uncertainty is abundantly clear is positioning by cap size. On the one hand, large-cap companies are more exposed than small-cap companies to global trade. On the other hand, smaller, more domestically focused firms would likely be more vulnerable to a U.S. stagflationary outcome. Add it all up, and we’re happy to remain at our long-term strategic weights.
Growth | Value
After a period of growth outperformance, value has recently performed better. That’s one more data point in favor of rebalancing to predetermined strategic allocations. Our model is split on stocks by style, so we remain neutral while we wait for more clarity on the economy, monetary policy and investor sentiment.
Fixed Income
U.S. | Non-U.S.
In terms of fixed-income sectors, our managers believe Treasury yields are rich for now and prefer mortgage- and other asset-backed securities. By credit quality, our models prefer investment-grade over high-yield bonds because of relative valuations and narrow yield spreads. Within high yield, our fixed-income managers favor comparatively higher-quality bonds rated BB and B.
Alternatives
Real Estate Investment Trusts (REITs) | Core Assets
This is another area where we prefer to maintain a neutral strategic allocation.
References to specific securities are for illustrative purposes only and are not intended as recommendations to purchase or sell securities. Opinions and estimates offered constitute our judgment and, along with other portfolio data, are subject to change without notice.
International investing involves special risks, such as political instability and currency fluctuations. Investing in emerging markets may accentuate these risks.
Investment return and principal value of security investments will fluctuate. The value at the time of redemption may be more or less than the original cost. Past performance is no guarantee of future results.
Historically, small- and/or mid-cap stocks have been more volatile than the stock of larger, more-established companies. Smaller companies may have limited resources, product lines and markets, and their securities may trade less frequently and in more limited volumes than the securities of larger companies.
The letter ratings indicate the credit worthiness of the underlying bonds in the portfolio and generally range from AAA (highest) to D (lowest).
Diversification does not assure a profit nor does it protect against loss of principal.
Rebalancing allows you to keep your asset allocation in line with your goals. It does not guarantee investment returns and does not eliminate risk.
Generally, as interest rates rise, bond prices fall. The opposite is true when interest rates decline.
Past performance is no guarantee of future results. Investment returns will fluctuate and it is possible to lose money.
The opinions expressed are those of American Century Investments (or the portfolio manager) and are no guarantee of the future performance of any American Century Investments' portfolio. This material has been prepared for educational purposes only. It is not intended to provide, and should not be relied upon for, investment, accounting, legal or tax advice.
