Massy Williams: So, Joe, on 2 April, we saw a tariff announcement, and the market reacted immediately to it. So can you talk to us a little bit about how this announcement and probably even what we're seeing on the global trade market right now are influencing the level of ambiguity, really, and uncertainty in the market?

Joe Davis: Yes. Well, again, it's been a lot for all of us to absorb and digest, Massy. What we are seeing a reaction is to one of the larger trade shocks we could have seen in over almost a century. So just even saying that is pretty profound.

Going into the year, we, Vanguard, my team and I, we were assuming that the United States would implement some tariffs, given what we understood, policymakers' intents. But what we have seen since that time is not only those enactments, but some additional tariffs that have been higher in the rate and broader, which, of course, you just mentioned with the 10% minimum on every country.

And so, clearly, that is going to have economic ramifications both for a retarget on some spending, particularly by consumers, as the prices go up. So it's what economists call stagflation. And it was a risk that we highlighted in our outlook this year. So again, it's a significant shock. And then you're going to have, of course, the markets processing the second-round effects, retaliation, potentially, of other countries.

And then there's the uncertainty itself of, is this the end, and then we'll see renegotiation, which is what I think ultimately we will see, but the length of time that takes. And so all of those are a tough mix to take—uncertainty, drags on growth, boosts to inflation. And then this went into a market—the US, in particular—that was somewhat expensive, for sure. And you put all those four things together, and I think that's why we're seeing the sort of market fallout that we're seeing.

Massy Williams: So let's talk a little bit about economic growth and some of the market dynamics that we should probably expect over the next few months. So when you think about, again, the tariff announcement or any of the recent developments that we have seen, how should we be thinking about that as investors when it comes to the market and the impact?

Joe Davis: Yes. Well, I think it's important to consider two things. One is, what will that economic impact? So that's for your question. And then I think secondly, which is the investment question, which is try to separate that diagnosis from what the markets may already be fearing. Because sometimes the markets can so-called overshoot and become too pessimistic. This happened at some point during the global financial crisis. And then the markets rebounded before the economy did, because it wasn't as worse as some had feared.

I don't think we're at that point yet. And so we're going to see in many countries, including the United States, a pullback on growth over the coming months, more likely than not. And we'll see higher prices on some parts of the market. We'll also see, ironically, some prices fall because of lower demand. Energy prices could be an example. And so you're going to have this sort of, really, mix of events. And it may not end soon.

I think the goal, to my understanding, of some of the tariff enactments is that you're going to have rounds of negotiation. But now this becomes a political assessment of how long will those negotiations take. And the longer that they take, the greater the short-term economic drag will be. And so this is going to be the environment that we'll likely operate in for the next several months.

And so it's certainly downside risk to many markets. Some markets will very likely, outside the US, tip into recession. And in the US, it's not currently in the assessment, but you're dancing close to those sort of conditions. And so that's going to be the environment. I think our fortitude will be tested. It will ultimately be rewarded. But I'm not going to paint a picture that we'll be out of the woods any time immediately.

Massy Williams: In this heightened volatility environment, we know that diversification, whether it's across region, across sector, across asset classes, is really crucial to investment success. Can you talk to us about how diversification actually matters when it comes to managing a downside risk?

Joe Davis: Yeah, and I think diversification—I think you hit it very well, Massy—diversification does not mean one does not experience losses. It means that you try to moderate those losses. And so, effectively, diversification, the power of that philosophy, is that you don't have concentrated positions in one company, one sector.

We were cautioning investors for two years now on very expensive technology stocks. We're not picking on technology companies. They were just very expensive relative to their fundamentals. You're not exposed to just one part of the bond market. And most importantly, you don't have all your eggs in either just stocks or just fixed income. More often than not, it can be appropriate to have a mix of both. And so those dynamics mean that you won't get, you may not get the very best possible outcome, the single best stock. But you also are not getting the worst possible outcome of whatever sector or country experiences that. And that's the power. It doesn't mean that one's portfolio is not going to experience losses for a period of time. And that's, unfortunately, the environment we're in right now.

MASSY WILLIAMS: Let's talk about other pressures that we know investors are also experiencing—rising costs, softening in demand. We also are seeing some supply chain disruption. All of those things have impact on the corporate earnings. So can you talk a little bit about how companies should be thinking about that? And what is the implication for the markets? 

JOE DAVIS: Well, I'll take the U.S., but you could effectively articulate or repeat what I said for other markets. So the fundamentals were weakening, but they were still decent in the United States before the recent tariff enactment. So that's positive. And again, depending upon what sector, but more likely than not, if you're an owner of a company or a CFO, you're going to be thinking about three things. One is, given the level of uncertainty, is this the end of the tariff rate increases? So you're in a wait-and-see mode, potentially. You also could be concerned about the tariffs' economic impacts that we just talked about. I may see less demand, or she may see less demand for my services, my company's products. That in and of itself can lead to delays. And then what we haven't seen yet but we'll see some of, which is, no actually demand is weakening. And so you can say earnings fall because you have less sales and revenues. 

And so we're in the midst of the first two phases. We will see part of the third unless they would disappear overnight, these tariff enactments. So all that points to, in parts of the world, recession with a high likelihood. In the U.S., it's dancing with a potential. Why I hedge that is it just will depend upon any negotiation we may see and if some of the tariff rates come down. But that remains to be seen. 

MASSY WILLIAMS: So, Joe, in addition of being a global chief economist, you also run our Investment Strategy Group. And that team is responsible for helping us shape advice and our solutions. So the macroeconomic views that your team is coming up with, we use that for asset allocation and location. So talk to us about how that's benefiting our clients. 

JOE DAVIS: What the Investment Strategy Group is doing is we're taking all the economic scenarios that have happened, could have happened, have happened in the past, and what have never happened. And we're also combining that with market fundamentals, which is sometimes not the same thing as the economy, right? Markets can get euphoric. They can get very pessimistic. And we're looking at all those combination of potential future outcomes next month, next year, and far out in the horizon. And we're doing that to ultimately say, for various portfolios and investment strategies, are they resilient based upon the goals that someone may have or resilient? And so that's what the team is doing constantly. 

I think of it as a risk management approach. In other words, is a certain balanced fund or asset allocation, a mixture of stocks and a mixture of bonds, even if it's diversified—what's its likelihood of achieving certain returns over a period of time that may be consistent with an investor's savings or wealth goals? That's what I call risk management. And so we're doing that constantly. 

We've had tariff scenarios for some time, as well as other scenarios around technology and deficits. And we put that all together to really assess risks. And if there's a point with which risks are really skewed, then that could potentially lead to better advice, discussions, or so forth. It's not about being smarter than the market. It's about realizing that there's always risks on the horizon, both good and bad, and to help investors think through the problem that they're—the goals that they're trying to achieve, as well as our fund managers, the goals that they may be trying to achieve. And we will continue to do that. 

Massy Williams: So a lot to navigate, a lot of uncertainty. And we know that things are continuing to unfold. What is the power of advice in this kind of environment?

Joe Davis: Actually, your word "power" actually really resonated with me, Massy. And I think the power, even going back to Jack Bogle, of our investment philosophy, it's around the diversification. And it's around the advice. The wisdom of those words is that staying the course is not easy.

I'm looking at my portfolio yesterday. My wife and I looked at it this morning. Now, you would counsel don't always look at it, but I'm a human being, and I have goals. My family has goals and objectives. And so it's that emotional response. This is our hard-earned money.

And that's why I think the power of advice—it's like having a good friend, a good coach that can say to you, or to my wife and I, what's your goals? And then is the current market environment looking, having the fortitude to look beyond. It's not because you don't see the headlines. It's keeping your eye on the long-term goals, knowing that the weather is not always nice. It can be stormy. And that's the turbulent environment we are currently in, and we may be in for some time.

But I think that's the power, I think, of advice. And that's just for asset allocation, let alone all the other things I may need, my wife and I may need for the years ahead of us. And so that, I think, is the power. This is not easy stuff. But if one can have good advice and good counsel, it means the likelihood of being successful in our goals go up dramatically, in my judgment.

Massy Williams: Behavioural coaching is so important.

Joe Davis: And also, what are the right expectations? Maybe do we have the right asset allocation? Also, things around taxes and so forth—even one feels the need to shift one's portfolio. But are you doing it in a tax-efficient way? These are all the counsel we've gotten, right? And I'm in the industry. So I think that's the power of having counsel, advice, perspective. And I think Vanguard is helping investors think through some things that cannot be easy.