MW Trump's 'chaotic' policy approach is creating opportunity for investors

By Joy Wiltermuth

There could be 'quite a shift in the world order,' says Mike Cudzil, a portfolio manager at Pimco

Tumult over President Trump's approach to tariffs and Russia's war with Ukraine has spooked households, businesses and Wall Street, with U.S. stocks just booking their worst week of the year.

Trump's on-off trade tactics kept investors on edge about potential tariffs on goods from Canada and Mexico all week, while Friday's jobs report for February showed further signs of a cooling U.S. labor market, although nothing too alarming.

The backdrop has clearly bred uncertainty in markets, but has also created opportunity for investors, said Mike Cudzil, a portfolio manager at Pimco, one of the world's largest asset managers.

Specifically, "there has been a major shift out of Europe and in Germany, in particular," with the potential for a massive fiscal package out of Europe next week, Cudzil told MarketWatch.

Friedrich Merz, Germany's likely next chancellor, has vowed to do "whatever it takes" to bolster defense spending by carving it out of budget controls, while also proposing a EUR500 billion infrastructure investment.

"That maybe only could have been done with some of this [U.S.] policy that looks like chaos," Cudzil said, pointing to Europe's hesitancy around defense spending in recent decades.

Goldman Sachs researchers this week said they expect spending on defense by European Union member states to increase significantly through 2027, albeit still reaching only 2.4% of GDP, compared to 1.8% last year.

The new projections followed a shocking Oval Office confrontation a week ago that left Trump without a deal with Ukraine President Volodymyr Zelensky relating to that nation's mineral rights. It also prompted Europe to bolster its commitment to aiding Ukraine in its war effort.

"What you are seeing is a repricing of risky assets in the U.S. relative to risky assets [abroad]," Cudzil said, adding that he anticipates there's more room to close that gap. "But there's also a repricing of U.S. fixed income relative to other fixed-income markets."

It's potentially "quite a shift in the world order" versus the past 80 years, he added.

The European STOXX 600 index XX:SXXP was up 9% on the year through Friday, while the U.S. benchmark S&P 500 index SPX was down 1.9%, according to FactSet, after two straight years of stellar yearly gains of more than 20% for American stocks.

Leslie Thompson, chief investment officer at Spectrum Wealth Management, said her team has been taking some profit in U.S. stocks and, as of Monday, began moving a portion into exchange-traded funds focused on stocks in developed foreign markets.

"We are still positive on the U.S., but we think there is some opportunity to profit from overseas investments," she said. "That is not something we've done for a while."

Popular European stock ETFs include the iShares Core MSCI EAFE ETF IEFA and the iShares MSCI EAFE ETF EFA, both of which were up more than 11% on the year through Friday.

In bonds, the 10-year Treasury yield BX:TMUBMUSD10Y ended the week at 4.3%, snapping a five-week streak of falling yields, while the 10-year German bund yield BX:TMBMKDE-10Y ended at 2.84%, according to FactSet.

"When risky assets are still at valuations that are somewhat lofty, as a rule you're supposed to have more fixed income," Cudzil said. Still, he favors a backdrop where government spending looks to be declining, and "that looks like the U.S."

Investors, meanwhile, have poured $12 billion into European stocks in the past four weeks, their strongest inflows in a decade, according to BofA Global.

That underscores how government stimulus in Europe could bolster the eurozone, while the Trump administration looks to rework its trade agreements and dramatically shrink the federal government without going so far as to trigger a U.S. recession.

Federal Reserve Chair Jerome Powell said Friday that the U.S. economy remains "in a good place" during a speech at the University of Chicago.

Read: Powell says Fed can 'wait for greater clarity' on economic outlook

Yet there remains heightened uncertainty about what the impact of Trump's economic policies will be. "If [Trump's] spending cuts go through, ultimately it trickles down to the state and local government," noted Jeffrey Rosenkranz, a portfolio manager at Shelton Capital Management.

The worry would be that could lead to broader job losses and a recession. Still, it would likely create "winners and losers," including some "good companies" with bad balance sheets, Rosenkranz said. "We are doing some work in advance to prepare in case we get some of those opportunities," he added.

-Joy Wiltermuth

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March 08, 2025 08:00 ET (13:00 GMT)

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