Tim Courtney, Chief Investment Officer
We often hear that “markets hate uncertainty.” We usually hear this conventional wisdom during times when markets are volatile and responding to some risk, as the market did in April over tariffs. But do markets hate uncertainty, and love certainty?
Well, let’s look at certainty. About as close as we can get to a sure thing is the Treasury bill (T-Bill) or maybe a bank CD. They’re low risk and virtually guaranteed to pay you back on time with appreciation or interest. But over the last 99 years, Treasury bill investors have received a 3% annual return, less annualized inflation of 3% leaves a real return of 0% per year.1 There are valid reasons for investing in T-Bills and bank CDs, but history proves what investment theory predicts you should get from certainty: a real nothing.
Stocks are assets that provide exposure to uncertainty. Their return has been 10% annualized over the last 99 years, or a 7% real return after inflation.1 To be sure, there were uncomfortable times and unstable markets over the last century. Markets don’t appear to hate uncertainty, but rather they reward investors who are able to manage it. What markets hate, to be more specific, is policy uncertainty.
Over the last five years, the most volatile stock markets have coincided with the greatest levels of policy uncertainty: March of 2020 (i.e., lockdown and reopening policy2), most of 2022 (i.e., inflation and rate policy3), and April of 2025 (i.e., tariff policy4). It is hard to decide how you will play the game if you don’t know what the rules will be. Still, market prices adjust to give us an amalgamated guess from all investors as to what might transpire. Below, we take a quick tour through key asset classes and their pricing.
Fixed Income. High-quality bonds and Treasury Inflation-Protected Securities (TIPS) are up 2-3% year-to-date,5 about where we would expect them to be halfway through the year. Lower-quality bonds turned lower after the initial tariffs but have since rebounded and are positive.6
Equities. U.S. large caps are essentially unchanged year-to-date.7 Small caps have borne the brunt of tariff risk so far and are now trading at discounts to their average valuations.8 International markets are well positive due to a weakening U.S. dollar.9
Real Assets. REITs, commodities, and MLPs are close to flat year-to-date. The notable exception is gold which is up over 20%.10
As of now, only U.S. small cap stocks are being priced as if investors believe the odds of a recession are meaningful (i.e., potential bad news is being priced in). The other asset classes are either flat or are moving due to dollar decline.9 As is usually the case, the outlook is uncertain but long-term investors should expect to be rewarded regardless of how the tariffs eventually play out. If you have questions, please reach out to your Exencial advisor.
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Treasury Inflation-Protected Securities (TIPS) are U.S. Treasury bonds indexed to inflation to protect investors from decline in the purchasing power of their money. The principal value of TIPS increases with inflation and decreases with deflation.
Treasury Bills (T-Bills) are short-term debt obligations issued by the U.S. Department of Treasuries with maturities ranging from one year or less.