Tips for Cash Investors in Times of Market Volatility

Introduction

Market volatility has been elevated following the White House’s tariff announcement on April 2^nd. While the source of this heightened volatility is unique from past periods, it may still be prudent to look to the past for evidence of how to operate in the current environment. For cash investors, we posit some principles that can be useful for thinking about how to navigate the current environment.

1. Understand that Uncertainty is Not Going Away Overnight

• The reality is that the events of April 2nd mark a sea change in the global trading order. As proposed, effective tariff rates in the U.S. are about to hit their highest level in more than one-hundred years, undoing a century of globalization.

• Current global supply chains—especially for more complex products—will take years, not months, to fundamentally change. Near-term easing of tariffs is more likely to come about through negotiation and pledges for domestic production, rather than completion of said investment.

• From that perspective, it makes sense that markets are and will likely continue to be more volatile relative to their baseline. Markets are trying to tease out the implications of this massive policy change in real time, all the while policy is changing in real time. Expect outsized swings in pricing as news filters through.

2. Stay the Course, Avoid Panicking & Review Your Investment Policy Statement (IPS)

• It’s easy to get caught up in the headlines and feel the need to react to what’s happening in the market. However, as with any type of investing, the best plan is simply to stay calm and avoid hasty decisions. The goal of having investment policies with credit quality and diversification requirements is to produce a durable strategy that can be maintained even in difficult market conditions.

• To that end, cash investors should try to avoid liquidating investments during a period of market turmoil. This is due to the fact that both credit and bid/ask spreads tend to widen out during times of stress.  Both developments could worsen execution for those who are looking to sell. 

3. Diversify Risk, Understand Counterparty Exposure

• Diversification is the best protection against investment risk; certain segments of the portfolio can act as a buffer in times of stress.

• Cash investors should understand their ultimate counterparty exposure across deposit, investment, and fund relationships. Some relevant questions include whether they have uninsured deposit relationships or investments in pooled products with non-U.S. government credit exposure.

• Credit monitoring is paramount to understanding how changes in the broader economic picture are impacting individual companies. Ratings are a starting point but not sufficient in and of themselves.

4. Understand your Liquidity Needs

• Firm up projections for internal cash needs – understand that access to capital markets may be more restrained than usual

• Assess the liquidity profile of underlying investments. This can be more of an art than science, and may require experience and understanding of how particular market sectors operate.

5. Fed is Non-Committal

• The implication of both higher prices and lower growth from tariffs does not provide a clear directional signal for Fed policy.

• The Fed is not likely to come in and support the markets without clear evidence of a significant deterioration in the markets. It is presumed that (all things equal) the Fed would prefer to keep the policy rate at its current level for as long as feasible. Jerome Powell’s recent comments on April 16th built upon this, implying he will need to see a sustained downturn in the economic data to warrant an interest rate cut.

6. Lock in Some “Protection”

• If your cash needs are settled, investing a portion of available cash at the longer end of the curve may be advantageous if the Fed lowers rates aggressively to combat a severe recession.

Conclusion

In summation, navigating this bout of market volatility requires a thoughtful, disciplined approach grounded in principles. Amidst uncertainty, cash investors should remain steadfast and avoid impulsive decisions driven by market swings. Staying true to established investment policies helps ensure durability of approach and consistency in decision making.  Market volatility isn’t going away, but investors can remain calm in the storm.