Volatility Positioning: How to Hold on for the Ride

Following Liberation Day, or what many are calling "Obliteration Day," the US equity markets swung from the doldrums of a bear market to a rip-roaring rebound after Trump’s 90-day pause announcement—all within one intense week. On April 7th, the US market traded 29.074 billion shares during a 8.51% performance swing, the highest number traded in history.¹ Only two days later, the market traded over 30 billion shares, breaking the previous record.

As the Trump Administration tries to achieve a multi-pronged reset to the US $30.5 trillion economy, we don’t believe that we have seen the last of volatility for equity investors.

Disinformation and the rapidness of the news cycle are disorientating, as investors try to find their bearings and make calls on positioning. Given market uncertainty, and the potential demand destruction, we reinforce the view from our Global Market Outlook 2025 that it may be beneficial to add assets that provide greater diversification, with a preference for bonds over equities, as well as assets that enhance stability, via overweight positions to cash, gold and other uncorrelated assets. In addition, drawdowns can provide opportunities to add risk assets at attractive pricing.

Bonds Can Provide Diversification, Capital Preservation, and Income.

Consistent with our views from early 2025, bonds have offered good value and the protection needed during a flight to quality. Cash still provides good carry, and a safe haven for preserving dry powder, but must be monitored as Fed Fund Futures fluctuate rapidly, indicating trepidation around just how many interest rate cuts will happen this year. As of writing, the market is looking for almost four cuts before the end of December, with the earliest coming as soon as June. The curve is steepening, as 2’s and 3’s have seen yields fall, with the former dropping -21 bps on April 3rd.² However, as the rest of the tariff story is still unwritten, liquidity has become increasingly paramount. US 10-year yields have swung widely over the past few trading days, falling -35 bps in early April, then backing up +29 bps from April 7th-10th. Additionally, a higher inflationary environment gives support to shorter duration TIPS and inflation linked securities. The risk-off dynamic disrupts previously tight credit spreads, creating uncertainties around corporate investment and consumer spending, and casting a cautious note on IG and HY for bond investors. To date, OAS has widened, but not to levels that indicate recession is imminent.

Opportunities Can Surface in Rough Terrain.

Looking across the globe, a shakeup in regional macro trends may lead to new opportunities.

An Escape Valve for US Equity Valuations?

The US equity market, with its high valuations, has suffered most relative to other regions, even as markets rallied hard post the tariff pause. Investors aren’t sure how much President Trump’s evolving trade war will diminish earnings over the first half of the year, and the word “uncertainty” will likely proliferate forward guidance (Figure 1). Additionally, the US consumer, the engine of global demand, will feel the impact of the market correction, especially if the labor market deteriorates. The flip side is that valuations have started approaching historical norms, with the 5 year median NTM P/E trading at ~20.5x.³ This could benefit investors in search of buying opportunities, as the case could be made that the US market is approaching oversold conditions. In fact, the April 9th rally aside, prior flows suggest some opportunistic buying has already occurred in US Technology and Mid-Caps over the past few trading days.⁴

Eye on International

International markets, such as Europe and APAC, will eventually have to digest the damaging nature of the trade war, and they won’t be doing so from such a high pedestal. Demand destruction will eventually radiate throughout these markets, as the cyclical nature of European equities can’t insulate that market forever. Value has outperformed growth YTD, but as the probability for a global recession gets revised higher, consumer-driven sectors, such as Financials, Discretionary and Energy, will suffer downward earnings revisions the most.

Within APAC, President Trump’s tariffs are harshest, presenting challenges for these economies to survive without demand for their goods or services. China—where tariffs were increased rather than delayed—is in the crosshairs, given their sizable trade deficit with the US and the competition for technological supremacy, both in terms of AI and their military advancement. The world’s second-largest economy has not come to the negotiation table quickly, and instead has raised the stakes through the sale of US Treasuries and through pointed measures to threaten the Trump Administration’s pro-growth agenda. The MSCI China is -18% since March 18^th. Equity markets are starting to reflect the realization that both countries could be in a more protracted standoff given the geopolitical complexity.

Gold’s Correlation Can Go Negative.

Gold’s correlation to major public market exposures is still positive today, but during the inflationary market conditions of 2022 and 2023, the asset had meaningfully negative correlations to these asset classes. On a 1-year rolling basis in 2023, gold to equities reached a coefficient of -0.64, and to bonds of -0.75.⁵ While the risk of inflation today might not seem as dire given the weight on demand, gold should protect investors from downside risk, and continue its positive price momentum due to the demand for physical consumption coming from Central Banks. In fact, we’ve seen correlations move meaningfully lower in the past few weeks, as SPOT prices are up +6.7% over the last month and +17.5 YTD. ETF Inflows into the shiny metal breached over $1.1B (USD) on April 9th alone.⁶

The Bottom Line: Your Investment Horizon Matters.

The reality of the current macro environment is unknown for now, and will likely take many months to figure out. For those with a strategic approach, the market may present a buying opportunity, while rebalancing the portfolio at cheaper valuations. For those taking a more dynamic approach, a defensive posture could preserve capital and allow the accumulation of dry powder to take advantage of further dislocation.

For those looking at how the State Street Global Advisors Investment Solutions Group (ISG) is positioning their Tactical Asset Allocation portfolios, please see the latest trades here.