Investors are told to ignore politics. That was before Trump 2.0

Warren Buffett has had a few things to say over the years about how investors should factor political leadership into their decision-making. His approach boils down to one word: Don’t.

“Probably half the time in my adult life, I’ve had a president other than the one I’ve voted for, but that has never taken me out of stocks,” the billionaire investor and chief executive of Berkshire Hathaway Inc. told CNBC in 2017, near the start of U.S. President Donald Trump’s first term in office.

“If you mix your politics with your investment decisions, you’re making a big mistake.”

He was right, as Mr. Buffett usually is. Over Mr. Trump’s first term, the S&P 500 soared 70 per cent and the bull market didn’t end there.

But the start of Mr. Trump’s second term is something else entirely.

The President has imposed tariffs on Canada and Mexico – and then carved out exceptions and announced delays, sowing confusion and leaving many investors exasperated. He has pivoted on climate change goals, fired federal employees, deported immigrants and strained alliances with Canada, the European Union and Ukraine.

Mr. Trump’s initial market-friendly policies of lowering taxes and reducing regulations, which had driven the S&P 500 higher during his first month in office this year, are being overshadowed by incoherence.

“Normally, I would say don’t allow politics to cloud your judgement,” David Rosenberg, founder of Rosenberg Research, said in an interview.

“But that is when we are in normal times. We are in completely abnormal times.”

Decades of consistent U.S. policy toward open trade has been upended under Mr. Trump. Though his threats to impose stiff tariffs on trading partners were initially dismissed as a crude negotiating tactic, business leaders are taking the threats more seriously.

“Let’s be real honest, long term, a 25-per-cent tariff across the Mexico and Canadian border will blow a hole in the U.S. industry that we have never seen,” James Farley, CEO of Ford Motor Co., told his audience at the Wolfe Research auto conference in February.

On Monday, Delta Air Lines Inc. slashed its profit outlook after acknowledging a downturn in consumer and corporate confidence. Kohl’s Corp., the department store chain, expects its sales will decline this year, citing consumer and economic uncertainty.

Market turbulence has taken hold, and investors appear rattled. While Mr. Trump’s envisaged tariffs on Canada, Mexico and China could raise an estimated US$120-billion a year, according to the Committee for a Responsible Federal Budget, market losses in the S&P 500 alone have accumulated to US$4-trillion as of March 10.

The American Association of Individual Investors, which polls its members on their outlook for stocks over the next six months, has reported that small investors have been losing enthusiasm for stocks in a big way over the past few weeks.

The University of Michigan’s index of consumer sentiment, which measures the mood among consumers, dipped sharply in February, surprising economists. These readings occurred well before Mr. Trump declined to rule out a recession this year in a March interview with Fox News.

“Uncertainty is a constant when investing,” Richard Bernstein, chief executive officer of New York-based Richard Bernstein Advisors, said in an e-mail.

“However, what seems different right now is that the administration is the source of that uncertainty. Most politicians avoid breaking what isn’t broken. I’m not sure that’s the modus operandi of the current administration.”

Mr. Trump entered the White House in January with a roaring stock market and healthy economy that were the envy of the world: Gross domestic product expanded by 2.5 per cent in 2024 and the S&P 500 had just notched its second straight year with gains of 20 per cent or more.

Many observers believed that the U.S. President, once in office, would moderate his views on tariffs or use them as threats to gain an advantage in trade or border negotiations. This optimistic case also rested on the belief that Mr. Trump would never allow his policies – aimed at spurring domestic economic activity – to cause harm.

Sky-high equity valuations, which compare share prices to estimated corporate earnings, reflected unwavering investor confidence – but left little room for error.

“That’s a tough starting point,” Emily Roland, co-chief investment strategist at John Hancock Investment Management, said in an interview.

She rattled off a list of economic indicators that suggest investors have good reason to challenge the bull market assumptions. Inflation expectations have picked up, housing data is weaker and an economic model used by the Federal Reserve Bank of Atlanta points to a 2.8 per cent contraction in U.S. GDP in the first quarter – all while the federal government is slashing spending.

“One of the biggest supports that the market has had over the past couple of years, which is relentless fiscal spending, is now fading,” Ms. Roland said.

Things look even more bleak in Canada. Here, economists expect that U.S. tariffs will throw the economy into recession and throttle our exporters, delivering additional challenges to investors looking for a way to ride out a chaotic presidential term.

The simplest approach in the face of these challenges is to ignore the current volatility and get on with life. For all the hand-wringing over stock market turbulence, corrections occur about every two years, on average.

This one might not be so unusual – and a rebound could start with a policy pivot.

Mr. Trump could ignite a relief rally if he backed down on tariffs. The Federal Reserve could come to the rescue, too, with monetary stimulus in the form of surgical interest rate cuts that promote economic growth.

Another approach available to investors: Avoid expensive and economically sensitive stocks out of concern that uncertainty will linger. Within the S&P 500 over the past month, technology and consumer discretionary stocks have suffered the biggest declines as investors recoil from steep valuations.

“Uncertainty feeds right into investor confidence, and investor confidence feeds right into the market multiple,” Mr. Rosenberg said, referring to the price-to-earnings ratio.

Investors can also look at pockets of stability, which largely circumvent the effect of tariffs and economic weakness.

Within the S&P 500, economically defensive health care and consumer staples have held up over the past month. In Canada, telecom stocks, grocers and utilities have been performing well as investors flock to stocks that pay attractive dividends.

More broadly, international stocks have been outperforming U.S. stocks. The Vanguard FTSE All-World ex-U.S. ETF, an exchange-traded fund that provides exposure to Europe, Japan and emerging markets, has outperformed the S&P 500 by a substantial 9 percentage points over the past month.

There’s also cash to consider, which provides not only a buffer against rising turbulence, but also spending power should bargains emerge.

That’s the approach Mr. Buffett appears to be taking.

In his annual letter to investors, released in February, the legendary investor didn’t mention Mr. Trump or tariffs. And he made it clear that the bulk of Berkshire Hathaway’s investments would always consist of stocks – mostly U.S. stocks.

But his mountain of cash also increased to a record US$334-billion at the end of 2024, raising questions about his view of the market. Despite Mr. Buffett’s reluctance to mix politics with investing, he is perhaps making an exception for Trump 2.0.