Trump's world of tariffs is shaking up time-tested investing strategies

• Stocks and bonds both fell after White House tariffs spooked investors in April.
• The 60/40 portfolio strategy is one of several conventional investing approaches that's struggled.
• Tariff uncertainty has also thrown dip buying and US stock outperformance for a loop.

disciples of the classic portfolio allocation strategy of 60% stocks and 40% bonds breathed a sigh of relief.

While the S&P 500 was undergoing a correction, bonds were seeing gains for their safe-haven appeal. Thanks to recession fears, yields on risk-free 10-year Treasury notes had fallen from 4.8% to under 4% (bond yields are inversely related to prices) between mid-January and early April. Diversification was working as promised.

Then, after the White House's April 2 "Liberation Day" tariffs announcement, things changed.

Stocks plummeted even further. But Trump's proposals also began to spook bond investors, who started selling off their holdings, leading to a rise in yields. The move motivated Trump to pause his excess "reciprocal" tariff plans for most countries: "The bond market is very tricky," Trump said on April 9. "I saw last night where people were getting a little queasy."

Since then, yields have risen as high as 4.49% while the S&P 500 has dropped as much as 12%. Both components of the 60/40 are down.

There are potentially a few reasons why yields started rising, making the 60/40 hedge ineffective for the time being. One may be that foreign investors are losing confidence in the US, according to John Pease, a member of the asset allocation team at asset management firm GMO.

"What it seems like is foreigners, in particular, reassessing how much US exposure they want to have and reallocating some of that money to foreign assets," Pease said. "That's the reason we've seen kind of these concerted moves in US equities, US bonds, and the US dollar all selling off together."

Another is that a hedge fund had a leveraged strategy known as a basis trade blow up, causing it to sell-off its Treasurys, said Lance Roberts, the chief strategist at RIA Advisors.

But inflation fears are also part of the mix, wrote Lawrence Gillum, chief fixed income strategist at LPL Financial, in a recent client note. Tariffs are likely to raise prices, leading investors to demand higher yields to compensate for the declining value of money over time.

That reality puts a wrench in the 60/40 going forward, said Lauren Goodwin, economist and chief market strategist at New York Life Investments.

"The 60/40 portfolio was designed for periods of low inflation," Goodwin said in a client note on Tuesday. "It won't work."

It's unclear how long the 60/40 will remain ineffective. For long-term investors, the strategy is still viable, Roberts said.

"The 60/40 allocation has outperformed being fully invested in the S&P 500 hands down over the last 130 years," he said.

But for investors with a shorter time horizon, it's a good time to reconsider how their portfolios are positioned, said Eric Markowitz, managing partner at Nightview Capital.

"I think there's a strong argument that inflation can erode bond returns," he said. "So if you're getting like a 3% or 4% yield on a bond return, but we have really high inflation, then you have to find your growth somewhere else. So it definitely could destabilize that 60/40 dynamic."

It's not just the 60/40

Other conventional investing strategies may be gone for now as well — one being that the US is the best place to find returns, according to Pease.

"In the particular case of tariffs and the particular case of rather erratic economic policymaking, there is every reason for both foreign and domestic investors to say they are less comfortable holding US assets than they've been in the past," Pease said. "And that is true of equities, that is also true of bonds."

He noted that European and Japanese bonds have not sold off as has happened in the US.

The notion that the Fed can step in with rate cuts if the economy slows is also not a given in today's world of tariffs. With the import taxes threatening to boost consumer prices, the central bank is reluctant to provide more juice to the economy.

Fed Chair Jerome Powell acknowledged the conundrum in a speech on Wednesday.

"Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem," he said, adding that "we may find ourselves in the challenging scenario in which our dual-mandate goals are in tension."

What's an investor to do?

Goodwin said inflation-sensitive assets are good bets in this environment.

"We like gold, broad industrial metals, and real assets as an inflation-aware satellite to a portfolio," she wrote on Tuesday.

For Pease, Japanese small-cap value stocks appear particularly attractive at the moment.

Markowitz said investors should focus on high-quality stocks, which have strong track records of earnings growth, low debt levels, and high pricing power.

But investors shouldn't feel forced to make changes to their strategy, Markowitz added, especially since the market outlook seems to change on a dime.

"I think there's going to be a certain segment of the investing public that feels like they have to do something right now," he said.

"I'm not advocating people necessarily do anything," he continued. "By tomorrow, we might be having a totally different conversation."