3 Smart Moves to Stay Ahead of the Market Storm

Veteran portfolio managers have seen big market crises in the 21st century. After the dot-com bubble burst in 2000, the global financial system flirted with disaster in 2008 and 2009. A few years later, Europe’s debt crisis shook global markets. Then, in 2020, a pandemic shut down the world economy.

It may sound cliché, but what doesn’t kill us makes us stronger—and better investors. Each crisis had unique features. And each time, investors learned important lessons, which we added to our toolkits to help us stay focused when the going gets rough.

Are Things Different This Time?

This year’s volatility feels unusual. Fast-changing US government policies have shaken up the global trade system, making it hard for companies and investors to forecast earnings. The US mega-caps and technology stocks that led markets in recent years are facing a reckoning over valuations and future growth. These are twin megachallenges for investors.

But every crisis was unprecedented in some way. To get through them, we remind ourselves that equity portfolio managers are first and foremost risk managers. As the world changes, our job is to evaluate evolving risks—to companies, industries, sectors and markets—and to make adjustments that enable us to achieve better long-term outcomes for our clients. Staying out of the eye of the market storm is paramount. Three guidelines can help us do that today:

Find companies that aren’t tariff-sensitive.

It sounds obvious but bears repeating: In any crisis, some companies are directly exposed to the biggest risks, others are not. When those risks explode, get out of the way. Think about banks during the global financial crisis or airlines during the pandemic.

While isolating tariff exposures isn’t always easy, some industries stand out. Most software companies, wireless carriers and domestic service providers simply won’t be affected by tariffs.

US financial firms are a great example. They’re immune to tariffs, and some banks have diversified businesses, attractive valuations and healthy balance sheets. Investors could enjoy a bonus if President Trump deregulates the financial sector, which would improve banks’ capital and expense positions. Of course, banks are vulnerable to an economic slowdown or recession. Still, we believe select banks with strong fundamentals should make it to the other side of the economic cycle in good shape.
Beware of crowded trades.

The wisdom of crowds is tempting when it’s making lots of money. But it often ends in tears. At the turn of the 21st century, investors who followed the herd to unprofitable, expensive dot-coms were big winners for a very brief moment. And remember those SPACs (special purpose acquisition companies) that were so fashionable in 2020–2021 until hundreds fizzled out of favor?

More recently, the Magnificent Seven and AI stocks were hugely popular and profitable investments. As they became very expensive, that trade started to unwind, while “unpopular” stocks rebounded. Few investors imagined on January 1 that European stocks would outperform the US, or that healthcare and consumer staples would lead the US market.

Crowded trades can crumble quickly, especially in jittery markets. A widely held stock can collapse because fund flows demand that others sell. So active managers should follow their convictions, even if they seem out of sync with the latest fad. That doesn’t mean all mega-caps or AI stocks are off limits. Just make sure your manager is buying them for the right reasons and at the right price.
Sharpen your focus on valuation.

Investors should always check the price tag on stocks they buy. These days, we think it makes sense to avoid very expensive stocks and to lean into value stocks, which outperformed growth stocks in the first quarter, reversing a long-standing trend.

In the past, value stocks were highly sensitive to economic cycles. That’s not necessarily true anymore. Investors can find plenty of stocks with attractive price/earnings ratios and quality businesses to boot. Cheaper stocks provide defense because when equities are repriced in a market storm, they’re unlikely to correct as much as more expensive peers.

Following these guidelines requires flexibility. As tariffs dramatically change the mechanics of the global economy, investors must adapt. For us, as US equity investors, that means creating a diversified allocation of exceptional growth businesses while leaning into value stocks with quality features.

Balance with Humility and Flexibility

Striking that balance in such tough markets also takes humility. The battle scars of past crises remind us to constantly question an investment thesis and ask whether changing circumstances warrant a rethink.

Falling markets are scary. Even after years of gains, down markets uncover mistakes, excesses and flaws. And when losses mount, emotion often takes over and may lead investors to make counterproductive decisions, like selling in a falling market even though equities often recover rapidly from the most volatile market moments.

But here’s the good news: we can counter those human responses to crises with experience. Applying the lessons we’ve learned with discipline and flexibility can help investors feel more comfortable staying in the market by easing the pain along the way to an eventual recovery.

3 Smart Moves to Stay Ahead of the Market Storm