Markets Don’t Seem Worried. Should Investors Be?

Traders work on the floor of the New York Stock Exchange at the opening bell on Friday. (ANGELA WEISS / AFP / Getty Images)

The S&P 500 and Nasdaq Composite are at all-time highs. So, it seems, are investor nerves.

Stocks have come roaring back from their Liberation Day lows, and while that’s certainly good news, it’s once again ignited a bull-bear debate. Understandably, given ongoing policymaking and geopolitical risks, as well as how expensive stocks have gotten and tech’s ever-increasing dominance leading to inevitable comparisons to the dot-com bubble.

That said, a rally doesn’t have to be popular to be profitable, and year-end index targets have been creeping higher even before the start of second-quarter earnings season.

Still, it doesn’t pay to be complacent, writes Jefferies Head of Sustainable and Transition Strategy Aniket Shah, especially if President Donald Trump really is rewriting the economic map in his second term: “In the past, investors could treat geopolitical shocks as short-lived buying opportunities; today, conflicts and abrupt policy shifts can permanently impair asset values in certain markets. This new environment demands that investors re-evaluate what ‘diversified’ truly means in their portfolios.”

Of course, the four most expensive words in investing are “it’s different this time,” so investors might be skeptical of the need for a paradigm shift, particularly when the market has seemingly glossed over recent risks.

Nonetheless, Shah believes that traditional risk frameworks that focus solely on macroeconomic cycles and financial metrics are riskier in a world where political upheaval is on the rise. “Few investment committees explicitly incorporate scenarios like wars, export bans, or national-security standoffs into their decision-making,” he writes. “This integration of approaches, however, is needed so that factors such as supply-chain dependencies, sanctions exposure, or regime stability are assessed with the same rigor as interest rates or earnings.”

That doesn’t mean that investors have to react to every news headline, but longer-term trends do deserve attention, he argues, “for example, how a major power rivalry or deglobalization trend could reshape trade flows or technology supply chains over years.”

That includes being aware of how different parts of an investor’s portfolio are exposed to geopolitical risks and stress-testing extreme scenarios.

On a practical basis, Shah writes that although tariffs are important, investors shouldn’t let that blind them to capital and financial flows. That dovetails with recent concerns other strategists have had about investors looking elsewhere in the world for investments, particularly given the lack of political will to address the U.S. budget deficit.

Shah also sees potential “storm clouds” growing around artificial intelligence as it relates to geopolitics and trade, as well as energy security. These themes might be more important to future returns than investors feel now.

His advice comes alongside that of TS Lombard, which warned that investors ignore tariffs and the current administration’s chaotic governing style at their own peril, given multiple “low-grade shocks” can take their toll like that of a frog in boiling water.

Ultimately, the market has taken more risks in stride than many might have expected. Given that surprises are likely to continue, investors have to decide for themselves how much risk is too much.

Write to Teresa Rivas at teresa.rivas@barrons.com