As market uncertainty continues around the Trump administration’s
trade policy, our Head of Corporate Credit Research Andrew Sheets
reflects on the key takeaways that investors may learn from the
ongoing volatility.
Read more insights from Morgan Stanley.
----- Transcript -----
Andrew Sheets: Welcome to Thoughts on the
Market. I'm Andrew Sheets, Head of Corporate Credit Research at
Morgan Stanley. Today I'm going to discuss what we think we can
actually learn from all of the back and forth in markets.
It's Friday, May 16th at 2pm in London.
One of the dominant questions of 2025 has been and continues to
be: What exactly is the strategy behind U.S. tariff policy. Are
these tariffs simply a negotiating tactic, designed to bring
countries to the table in order to strike quick deals. Or are
they something very, very different. An attempt to fundamentally
reduce U.S. trade deficits, raise significant revenue, and bring
production back to American shores.
At a recent conference with some of our largest investors, we
asked them which of these explanations they thought best applied.
Well, about a quarter thought it was a negotiating tactic;
another quarter thought it was that fundamental shift. And the
remaining half simply weren't sure yet.
Now, it's possible that this ambiguity is actually the point
designed to keep trade partners guessing in order to secure
better terms. It's also possible that very different views on
trade exist within the administration, and we're seeing them vie
for influence – perhaps almost in real time. So, amidst all this
uncertainty and back and forth, it's useful for investors to try
to take a step back and think what, if anything, we've learned.
First, we think we've learned that markets have a pretty clear
view on tariffs. Credit and equities sold off aggressively as
tariffs were ramped up. They have rallied back almost as quickly
as these same policies were paused or reversed. Second, this back
and forth does complicate the economic data and makes it more
likely that the Federal Reserve will leave interest rates
unchanged, waiting for more clarity. At Morgan Stanley, we
continue to think that the Fed makes no interest rate cuts this
year.
Third, even with the Fed doing nothing and interest rates moving
around, bonds did diversify portfolios. Over the last 90 days, a
portfolio of high-grade bonds, like the U.S. aggregate bond index
has had just one-fifth of the volatility of the S&P 500,
while at the same time delivering a higher total return. Yes, we
think there is absolutely still a case for bonds to diversify
within portfolios.
Fourth and finally, the shock of the initial tariff announcement
has passed. But there is still very real uncertainty about the
economic impact, as even with the recent pauses, U.S. tariffs
remain relatively high versus recent history.
The next two months should start to give us the true picture of
this impact – or the lack thereof – on both activity and prices.
That will tell us whether the storm has truly passed through or
whether we're simply in the eye of it.
Thanks for listening. Let us know what you think about our
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