Updated Letter from the CIO

Dear Investors,

Some Investors Are Panicking. You Should Not.

Giving advice to not panic during severe market downturns is often customary and can frankly seem a bit boiler-plate. We get that. But it is perhaps the most important piece of advice financial consultants can give — because it is during times of market turmoil when many investors get it wrong. We understand. It’s not easy. Making decisions with money can be an emotional endeavor. Too often investors engage in investment decisions when the emotional weight is the heaviest. History is littered with instances where investors extrapolate the worst at just about the time when a faint light begins to appear at the end of the tunnel. Don’t let this be one of those times, because we in fact see some of that light. We’ll get to that.

What We Know Today

The real answer is not much — but we are no different than many — and that is the key reason markets are reacting. When there is impaired visibility into economic and investment outcomes, people reign in risk-taking and re-calibrate. Right now, market participants are busy adjusting economic growth and earnings forecasts, but the problem is the tariff landing point is fluid at the moment. Announced tariffs by the Trump administration may be negotiated down. That has always been part of the plan. This tariff exercise is perhaps one part policy and one part negotiating tactic. The unfortunate reality is that while negotiations are ongoing, forecasters have limited insight into fundamental outcomes. In such cases, some forecast the worst (recession or global trade war, for instance) and then adjust as new information becomes available. We believe that many of the announced tariffs last week will be negotiated down. Meaning the fundamentals of this market and economy, when the dust settles, may be better than what is currently being reflected in asset prices.

Now the Negotiations Start

It has already been reported that many countries have come forward with a willingness to negotiate around the tariff terms. Countries in the Eurozone (in aggregate), Asia-Pacific, and South America have been some of the most notable. This is a good sign, and again, likely part of the plan as far as the Trump administration is concerned. The U.S. set its tariff marker and compelled affected countries to come to the table. Call it Negotiation 101. The outcome is likely to be U.S. tariffs that are far less than those outlined last week and potential concessions from those countries the Trump administration targeted as applying unfair practices. The biggest and admittedly significant hold-out so far has been China, although that was to be expected.

What About the Light?

Our previous reference to “light at the end of the tunnel” has everything to do with the level of capitulation we have already seen from market participants. During a material market sell-off you often need to see a flushing of the market or capitulation selling before you can begin to look for a recovery. The trading activity we saw late last week, and in Asia-Pacific and Europe today (Monday, April 7) likely qualifies as market capitulation. Equities were being sold indiscriminately. Credit spreads widened. Investors were divesting of risk-based assets across the board. While we cannot say this is the end of the selling pressure, we can say that with tariff negotiations beginning in earnest and with fundamental visibility likely forthcoming for forecasters, we believe we may be an important step closer to finding an equilibrium in asset prices. Therein lies that light at the end of the tunnel — the signal that tells us that now is not the time to succumb to emotion and change the course of your diversified investment plan.

Sincerely,

Marc Zabicki, CFA
Chief Investment Officer
LPL Financial