Understanding Tariffs and Market Volatility ft. Bill Puggini

With ripple effects from recent tariff policies, investors have been feeling all kinds of uncertainty lately. Bill Puggini, a senior portfolio specialist with Vanguard Financial Advisor Services, is helping us make sense of the current economy and offering advice on how investors can survive market volatility.

You can find more episodes of Common Cents on the Prairie™ on Apple Podcasts, Spotify, YouTube, Amazon Music, and on our website.

Watch every episode on YouTube, and subscribe to First National Bank's channel!
Follow First National Bank on Facebook
Follow First National Bank on Instagram
Follow First National Bank on TikTok
Follow First National Bank on X (Twitter)

Transcript

0:00

- All forecasts are wrong, some are useful. I think that's a really important thing to keep in mind coming in because if you knew, you know exactly what was going to happen with markets, you'd probably only invest in one thing, and that would be whatever the best return is going to be.[slow grunge music]- [Adam] Welcome to "Common Cents on the Prairie," a podcast dedicated to helping you demystify the sometimes complex topic of money. I'm Adam Cox, head of Wealth Management for The First National Bank in Sioux Falls. We're a community bank based out of South Dakota. In this podcast, we share expert insights from around the country and stories from our local community to arm you with the tools you need to make better financial decisions. because the truth is, the more we talk about this stuff, the better off we're all going to be.[slow grunge music fades] Today, I'm thrilled to be joined by Bill Puggini, a senior portfolio specialist with Vanguard Financial Advisor Services. In his role, Bill consults with advisors on investment thought leadership, and Vanguard's full range of investment solutions. As a firm, Vanguard oversees more than $10 trillion globally. Bill has held a variety of roles since joining Vanguard in 2008. Bill earned a finance degree from the University of Arizona and holds FINRA Series 6, 7, and 63 licenses, in addition to the chartered financial analyst designation. And helping me with this conversation, I'm happy to be joined again by the head of our investments team, Kyle Cipperley. I hope you enjoy our conversation with Bill Puggini. Bill, welcome to the show. Thanks so much for joining us.- Thanks for having me on.- Well, so whenever it works, we like to start our episodes off with a little icebreaker. Sometimes it's obvious what we should ask and sometimes not so much. But given the fact that you've got a guitar hanging on the wall behind you, why don't we start there? What's the story with the guitar?- Yeah. Maybe not always common for an investment professional, the guitar,[Adam laughs] not always professions that jive well together, but, yeah, I don't play it as much as I used to, but it does have an interesting story. So I actually acquired that guitar out of a classified ad back in around 1995. My mom helped me buy it. It was a classified ad we went and, yeah, a woman was actually selling it because her husband had been arrested.- Oh, my.- And she was, I think, equal parts mad at him and equal parts, maybe trying to help out and make ends meet. But so, she was selling all of his stuff,- All of it.- And so, I ended up getting a pretty good deal on the guitar, and that's how I got it. I started playing, you know, when I was younger, played for a long time. Fast forward to when I was in college, my parents' house actually got robbed, and the guitar got stolen, so we lost the guitar. And that guy who, you know, we've never confirmed or denied if it's the same individual who we bought it from, who was also in jail, but he got caught in a high-speed chase between Arizona and Utah. So I'm from Arizona, and so, the guitar made its way back. So, it's been a long journey with the Gibson Les Paul special behind my right shoulder there.- Oh, what a story. Not a prop. Not a prop.[both laugh]- [Bill] Exactly.- Oh, that's awesome. Thanks for sharing that, Bill. All right, so we are recording this episode in late April of 2025. And markets recently have been interesting, spirited, maybe, we'll say. So, we're looking forward to getting your insights on a whole range of investment topics today. So starts us off the conversation. I think, Kyle, he's got the first question for us.- Yeah, Bill, why don't you just riff a little bit on, maybe, assume somebody just was under a rock the last month. Describe the, kind of the market environment we've been in April. You know, the volatility we've seen in the stock market, bonds just what's been going on in the markets, what's been causing all of the volatility.- Notice you used the word riff, too, by the way.- Thank you.- That was nice.- Thank you.[Adam laughs]- Nice pun to get us started. But, yeah, look, it's been a, it's certainly been a challenging month at the very least, but I've even zoomed back to entering the year in the conditions that we found ourselves. So, you know, there's really three things I would point to entering the year, right? That's, one, we had very high equity valuations. And when I say high, I mean relative to our fair value, the only time it's been higher has been around the dotcom bubble. And that's not to say that, you know, we think we're in a similar type of situation. Just say equity valuations were high. Economic policy certainty was at an all-time high. So there's an index that tracks that. And coming in in January, that was actually higher than it was during peak COVID. And the highest that it's ever been. And then, also, we had tight monetary policy which we still have. And so, those are three conditions that really, a lot of times, can lead to volatility in and of themselves. And we had three of them sort of historic levels, if you will, so at least with valuations and uncertainty. So, you know, there was some concerns, I would say, just entering the year in general. And then, you know, certainly, I think what has driven the more recent volatility has been in even further uptick in uncertainty, and particularly around tariff announcements, right? So tariffs were announced to be enacted on part of the, across the entire globe for imports into the United States. And, you know, tariffs additionally have sort of, there've been times when tariffs have been announced on again, off again. And so, there's been some uncertainty around what ultimately is here to stay, what that policy will look like over the long term, and ultimately, the economic fallout of that. So the biggest two components of the fallout, of tariffs in our view is, you know, potential for slowdown in growth from a GDP standpoint. So just slower overall growth in the US and global economy. And also, an increase in inflation, maybe not over the long-term, but for sure in the short-term because, you know, ultimately tariffs act sort of as a sales tax for imports coming into the US. And so, that has, you know, it raises prices. And so, you're sort of fighting the slowdown in growth, which ultimately is not a great thing for the economy where the goal is faster growth. And a pickup in inflation. And we've all felt the pain of inflation over the last several years. And so, those really, where the market was concerned on top of the uncertainty of what may potentially be in place for the longer term. And so, we've seen a tremendous amount of volatility in the market. We've seen that primarily from US stocks. I mean, we've seen drops of, you know, close to 20%. We haven't quite eclipsed that 20%, but we've also seen, you know, challenging performance and volatility from everything, even the safe havens. So things like US treasuries, the US dollar, which typically act as a safe haven in that type of volatile environment that we've seen. And so, we've seen really challenging performance across, you know, the entire investment landscape. Although, you know, the latter treasury is the dollar not sold off nearly as much as equity markets have.- So with the ongoing uncertainty around tariffs, how might you talk to investors about portfolio construction, just given that uncertainty and trying to mitigate risk, but maybe, on the flip side, also trying to take advantage of some opportunities that weren't there six months ago.- Yeah, look, I think there's a few things I would say to in terms of like, you know, just what do you do in the type of environment that we're in? You know, first of all, there's a quote from a portfolio manager that we work at Vanguard, he, that I really like. He said, you know, "The market puts a tremendous amount of pressure to do today what you should have done yesterday." That's not to say anybody should have anticipated. It's just to say like, once prices move, you kind of kick yourself and say, man, I wish I would've saw that. I wish I would've seen that coming. But that's the nature of the market. It's incredibly unpredictable. And so, you know, anytime there's volatility, there's sort of pressure to do something, I think a lot of times. And, you know, really from our standpoint, what is the main thing that I think, people, everyone should be doing right now, it's reinforcing the plan that you're sticking to. Every good plan starts with asset allocation, a broadly diversified portfolio, you know, assessing both what your goals and needs are, as well as your ability and willingness to take risk. And I think, really, if none of those things have changed, I don't think there's really anything necessary to change in the overall plan, right? Certainly, with the volatility that we're seeing, you know, I think what we should be doing is rebalancing to make sure that we're adhering to the plan that we had and really executing that plan, right? I'm a golfer, so there's a lot of focus on golf that comes around the process and not worrying about the results. And if you continue to stick to that process and execute that process and that plan, then ultimately, the results come. And I think investing is very similar. So it's really, right now, I think, it's about making sure you have the right plan and making sure that you're sticking to that plan. Our late founder, Jack Bogle, he's famous for "Stay The Course." It's a little bit of our mantra here at Vanguard, and that doesn't mean do nothing, but certainly, it means doing all the things that I just mentioned, right? Making sure that you have the right plan in place and that you're executing that plan. And if you're not executing that plan, then then making the necessary moves to make sure that you get back in line.- So investing process and golf. I think you just have a new best friend.- Yeah, absolutely.[Adam laughs] We going to talk more. We're spending a lot of time with our clients that are worried about the current news events. Just try to zoom out and look at history a little bit. And I think that helps once you realize that we've kind of been here before, and it just kind of relaxes people a little bit. Maybe could you talk a little bit about any historical parallels that you've observed, what we're experiencing currently that might point to where we might be headed in the future as far as, you know, stock market, bond market, et cetera?- Yeah, I mean, every market is unique in some way, right? It's never the same thing that you've seen before. I think, you know, what I would say is volatility is nothing new. So when you look at the performance of the various asset classes, we've not yet come close to approaching, you know, historical levels of, or things that we've never seen in terms of negative performance. You know, we are seeing some things that are certainly concerning for the market and for the economy and sort of the market is in some ways, almost a voting mechanism of, you know, what the expectations are in the market more broadly. And so that, that certainly gives you concern. From a policy standpoint, I would say this, it is somewhat unprecedented, and the speed in which policy is being enacted and in which, you know, that has the potential to change expectations around growth and inflation. The volatility that we're seeing in the market, you know, I would say is not unprecedented. But if you do look, at times, like certainly, you know, volatility, I think it's typically there for a reason. You don't have volatility. There's nothing to worry about, you're unlikely to have a lot of volatility, right? So usually, volatility comes when you have something to worry about, and that's what creates that volatility. But that's ultimately, what creates opportunity for investors. And, again, executing a plan where you have various asset classes, things that perform differently through different environments, it gives you the ability to weather these types of storms. And so, one thing with volatility, I'll also mention, right, is typically when you enter a volatile market that's there to stay, you know, the volatility is rare, but once you're in it, it typically is there for a little while. Maybe like a couple numbers to maybe, make some sense of that last statement is, you know, in any given market, a daily move in the stock market of 3%, whether up or down, the likelihood of that occurring in a single day is only 2%, but once a single day move of 3% has happened, there's an 80% chance that you'll have another one within the next 30 days.- [Adam] Oh, wow.- And so, you know, a couple things to think about there, right? Volatility is rare, but when it happens, it tends to happen on a daily basis. It doesn't just happen and go away. You know, oftentimes, the worst days on the market are followed by the best days and vice versa, best days followed by the worst days. So staying invested gives you the chance to stick to it and weather through that volatility. But making emotional decisions is sort of where you can get yourself in trouble. And that's really what investing is about, is it's about adhering to a long-term plan and not making those short-term emotional decisions.- Something that we talk about all the time is we're really in the behavior business as much as we're in the investment business. And so, have you seen any investor behavior trends recently during this period of volatility? And how are you guys helping to avoid investors or to help them not make decisions that are not going to be in their best interest long-term?- Yeah, I mean, I think you're exactly right, right? And that's the true value of advice is sort of that behavioral coaching and the ability to, that sort of help sticking with those plans as we've talked about. I think we've actually seen some really promising trends recently, particularly from like individual investors where we're seeing a substantially higher proportion of buy orders than we are sell orders.- [Adam] Yeah.- And so, I think that that's an indication that, you know, that sort of mantra, "Stay The Course," is alive and well where, you know, when the market is down, usually when you see your favorite, you know, I don't know, sweater, or hat, or golf club, or guitar on sale, most people say, hey, that's a great buying opportunity. It's cheaper than I'm used to. When stock markets are down, you don't necessarily tend to get that same feeling of, this feels really good, let me go buy this. It tends to be a little bit more of a challenging environment to buy into, but it's still a similar concept, right? You're getting a lot of those same companies that have been there and that are valued at a pretty high level, but you're having the ability to buy those at a cheaper multiple. And then, at the same time, fixed income bonds, I would say, yields on treasuries and other bonds, for instance, over the last 15 years have been incredibly low and now, they're significantly higher. That came with some pain. But we think there's a lot of opportunities for bond investors to now get a lot higher yield than they've been getting over the last 10 to 15 years. And not only does that yield give you return, but those tend to be the best diversifiers in a challenging equity market. And so, we think that's a great opportunity for investors right now as well.- Your comment about sales, and funny, I don't even think I mentioned this to you, someone told me, or I heard the other day that "Stock market is the only store in the universe where people run for the exits when everything goes on sale."[Adam and Bill laugh]- Yeah, this probably means we're not out of the woods yet on this stuff, too, because it's only when people are calling you crazy for buying-- [Adam] Yeah.- stocks. That's when you really feels like it's a bottom. But-- Yeah.- We've had a similar experience here. Our clients have generally been in a buying mood in this last month and which is unusual in historical down markets, so see how it plays out. But, one question for you, Bill. You know, as I look at your 10-year return for not your Vanguard's 10-year forward return forecast for US stocks going into this year, it was like 3 to 4% roughly for the next 10 years, which is another way of saying that the markets were overvalued, which you mentioned earlier. You know, and return forecast for bonds was like 4.7 to 5.7% for the next 10 years. But international stocks was like 7 to 9% per year over the next 10 years. You know, for the last 10 years, the experience for US investors has been just by the S&P 500 and everything will work out. You'll get really good double-digit returns. Could you maybe talk a little bit about how you guys arrive at these four, 10-year-return forecasts and what they might imply for what investors should be doing as far as asset allocation between stocks, bonds, US versus international?- Yeah, yeah. Look, I'm a big fan of soundbytes. So another soundbyte that I like when it comes to forecast is, and I'm sure somebody has attributed to this quote somewhere, but it's, "All forecasts are wrong, some are useful." I think, that's a really important thing to keep in mind coming in because if you knew exactly what was going to happen with markets, you'd probably only invest in one thing and that would be whatever the best return is going to be. And so, I don't think that's really the purpose of a forecast. You know, as you mentioned, you know, we have a fairly bear, I would, bearish, I don't know if there is the right word, but it's a muted forecast for US equity markets and right, we tend to forecast out 10 years as opposed to doing point forecasts, right? Over 10-year horizon, returns tend to be driven by fundamentals. In other words, like what are underlying businesses actually achieving in the underlying economy. Over the short term, it's, as I said earlier, much more of a voting mechanism or much more of a sentiment. Like what does the market think is going to be the results? So I'd start there. Two, I think it's really, it's about expectation settings. So, you know, knowing, hey, what are the current conditions and how does that affect the relative attractiveness and the returns I can expect to get over the next decade? And I think no matter how you look at it, the market today looks much more expensive, it's more challenging to find a path towards the really strong, 10-plus percent returns that we've seen from US equities over the last decade. Now, again, that doesn't mean you don't invest in US markets, right? So, I look at the last two years, we had a pretty muted outlook for US equities, and then here we are, 2023, 2024, the S&P 500 return, north of 25%, right? So the market can, even if it's a little bit more predictable in the long-term, you don't know when those returns are going to come. So that's another piece. And that's around, again, more around diversification. And so, you know, really, again, it's about setting expectations and using that as a guideline, but not necessarily, you know, changing your investment mix because of that. Now, why are international markets more attractive to us than US markets? Valuations is a piece of that, but there's really four things that we look at when we're looking at, you know, market expectations between the US and for international. That's valuation. So what's the price that you're paying? That's the underlying growth in earnings. Ultimately, that's where you're buying. When you buy a company, it's the promise of future earnings and cash flows. You also have dividend payments and then you have the dollar. So for US investor, investing in international securities as the dollar weakens, that actually makes those international securities that those currencies are strengthening. And so, it makes them worth relatively more. Now, when you look back at the last, you know, since the, say, the entire period since the global financial crisis. I think a lot of, there's been a lot of talk about US exceptionalism, right? And I think most people apply that to the growth. And we've seen that in the tech companies, the largest companies in the world coming from the US, very innovative companies and quite frankly, with really strong results, so don't blame that. But when you actually dissect the difference in returns between international and the US over the last 15 years, that growth aspect has only been about a third, or I should say, it's only explained about of the third of that return differential. Another third has been explained by just the increase of prices that is not explained by earnings growth and has also been explained by a strengthening dollar. And so, you know, again, the dollar and valuations have played two thirds of the role over the last decade. So, as we look forward from here, you know, now, we're at even higher level of valuations for the US and much higher than we are for international. We have dividend payments for international companies that are about double what they are for US companies. And our expectations for the dollar over the next decade is that the dollar is very strong right now and is likely to weaken over the next decade. We still expect the US to outgrow international markets. We think the US is a more growth-oriented economy, but that's only, again, one of the four factors that influence our forecast. Whereas, again, the other three dividends, the dollar and valuations are more attractive for international, and that's why our return forecasts are higher there.- Did you see people or investors start to give up on international?- We have. That's, I'd say, one of the biggest challenges over the last couple of years, right?- [Adam] Yeah.- I mean, I think, one, there's a home bias for all investors. I think, no matter where you look at, whether that's a US investor tending, having a higher tendency to invest in US companies, it's what we know the best. But you can see that on a local level, right? You tend to see people in the Bay area investing in more tech tend to see, you know, investors in Texas investing in energy. So there's certainly a bias towards what you know better and that applies certainly for US investors investing in US stocks and global stocks. And so, that's something that we've seen a lot. And then you just couple that with the performance, and I mean the just incredible performance we've seen from the US market relative to international. And I'd say that, that's one of the concerning trends is that we've seen people sort of, kind of steal your words,"Giving up on international" a little bit. And, you know, really the concern is that that happens at the worst possible time. You know, typically, you don't expect international stock to outperform the US when US stocks are performing, you know, 10-plus percent on an annualized basis. You tend to see international performing well when you're not getting those returns from US markets. If you think about the period between the dotcom bubble and the global financial crisis often described as the lost decade. International outperformed US during that period. The 70s and the 80s were periods of challenging markets in the US where international outperformed. And so, really if you look back at the last 10, 15 years, international stocks, if you have invested there, have not held you back from meeting goals. But if US stocks don't give you that same level of return over the next decade, not holding international stocks could be the difference between meeting objectives and now.- Yeah.- Last thing we haven't really touched on is interest rates. So what's going on with the housing market to some extent with mortgage rates, interest rates, obviously, are very attractive on what you can earn in cash right now. We've got a lot of clients that are feeling comfortable just, you know, having money in a money market account earning four plus percent which is really good compared to the zero that they got over the last 15 years. There's a lot of people that are, maybe recently, bought a house and have a high mortgage rate and are hoping to refinance.- He's talking about me.- Talking about him.[Adam laughs] There's some people that are waiting to buy their next house and, you know, maybe hoping mortgage rates comes down. Just a lot of uncertainty with where interest rates are headed. And I don't expect you to tell us where they're going to go for the next year or so, but just maybe talk a little bit about what Vanguard thinks about interest rates and where we might be headed from here.- Yeah, I mean, maybe even just adding a little color on just like what we think is happening in the interest rate environment.- Yeah.- And, sort of, what we think going forward. I'd say, that there's two things you're seeing impact, you know, basically, what we call the yield curve, right? So that's short-term interest rates. So borrowing from anywhere from like, call it one to five years, and then longer-term rates, all that 10 plus, that's where you start getting into mortgage rates and things like that. And what you've seen is shorter-term interest rates actually coming down. So, when I'm saying that, I'm primarily looking at the two-year interest rates. So we've seen those actually come down. That tends to be an indicator of what the market is pricing in of set expectations. And usually, if those are going down, that tends to happen around concerns around growth, right? And so, as I mentioned, tariffs acting like a bit of a sales tax, that tends to slow growth, increase inflation. So you have slowing growth, sort of putting downward pressure on shorter-term rates. And at the same time, longer-term rates have actually been been going up. And I would say that that's, you know, a broader reflection of concerns around the US, right? I think, the US has always been that safe haven that when markets are having turbulence, they flock to the dollar. We're seeing a little bit of the opposite happen to the degree where interest rates are actually going up, those longer-term interest rates. And that tends to be more of a reflection of, you know, I think, sometimes we personify the market, right? But like the market having trust in the US. There's three things, I think, that really prop up the US as like the reserve currency, that safe haven asset, it's the size and stability of the economy. It's the fact that global trade and finance is really built around the dollar. Those two things likely aren't going to change anytime soon. The third one, which is the strength and stability of US more of like as an institution and convention democracy, et cetera, that is what I think is being challenged a little bit by the market. And that's why you're seeing the longer end actually go up while you're seeing the shorter end come down, which is a little bit unusual for an environment like this. You know, we do think that over time, the US still is that stability that we're not seeing things that are ultimately a threat to the stability of the US in the global marketplace. So, we do think that that could ease a little bit and particularly, if we continue to see volatility in the stock market, that tends to be, again, constructive for bond markets where prices go up, yields go down. And so, I think, those are the things that, those are the primary things that we're seeing in the market and that we think, you know, where longer-term interest rates, again, I think present an opportunity, right? Because those rates have gone up. That means for bond investors, that means higher yields, higher income. And so, we think that that's really a good opportunity right now, especially in the face of high-equity valuations and a more muted outlook for equities overall.- So Bill, if I were to ask you to take that guitar off the wall and play your favorite song, what would that be?- Well, I don't know if I would remember how to play it off the top of my head, but my favorite song to play when I was playing it regularly, and this is probably before I had two toddlers, I probably had a little bit more time to play the guitar, but my favorite song to play was "Stairway to Heaven."- Oh, I mean, come on.- It's always a fun one and a classic.- Yeah. Nice, nice. Well, Bill, this was awesome. Thank you so much for cutting out some time for us today and giving us some insights. We really appreciate it. Kyle, thanks for joining me again in the chair.- Happy to do it.- Appreciate it. Bill, we'll talk to you again soon. Thank you so much.- Thanks, Bill.- Appreciate it. Thank you.- [Adam] I hope you found this helpful. If you did, please subscribe and share with your family or friends. If you have a topic you want us to cover in future episodes, send us a note through our website, and if you're at the point where you want an expert opinion on your finances, reach out and we'd be happy to start a conversation. And, remember, any comments, insights, or strategies discussed on this podcast are intended to be general in nature and, therefore, may not be suitable for you and your situation, whatever that may be. Before acting on anything we discuss, please consult with your attorney, CPA, and/or your financial advisor.