Tariffs—The Market Dislikes Uncertainty

Monday, April 14, 2025

Commentators frequently exaggerate the impact of public policy on investment outcomes. Explaining fluctuations in historical equity returns with political stories is virtually impossible, even for the most ardent partisans. In many ways, this held true in the first quarter, with the market shrugging off many announcements by the new administration, but with one glaring exception—tariffs. In its collective wisdom, the market made it very clear that it does not like tariffs, and especially uncertainty over tariff policy.

The uncertainty is immense. Are tariffs a negotiating strategy? That sounds temporary. “Permanent” auto tariffs? That sounded permanent—until it was paused. This level of uncertainty unnerves business decision makers at firms large and small, across multiple industries.

Not surprisingly, equity investors pivoted away from the riskier corners of the market towards both value and low-volatility stocks. Value stocks, as always, are a mixed bag. Some value stocks have low apparent valuations, but they are cheap for a reason—either poor execution or existential risks that make the market wary. Miller/Howard’s focus on high and rising income means we try to avoid low-quality, controversial value stocks. After all, these risky names may have a dividend cut in their future.

In contrast, we seek holdings that tend to have demonstrated earnings power yet attractive valuations that are not dependent on the latest growth theme. Low valuations and consistent earnings enable firms to pay good dividends without stretching payout ratios.

The real winner in the first quarter was low volatility, best exemplified by the S&P 500 Low Volatility Index which outperformed the S&P 500 Index by over 11.5%. Low-volatility stocks lagged the broad market in recent years, breaking the long-term historical pattern (for the past 50 years) of outpacing the S&P 500. This observation sometimes puzzles clients because boring stocks rarely keep up in go-go markets. But over the long term, downside protection in bad markets has been a key to the overall outperformance of low-volatility stocks.

Miller/Howard's Positioning

Miller/Howard’s portfolios tend to have both value and low-volatility characteristics. While it is possible to find expensive, volatile stocks with high dividend yields, we have found that those characteristics make dividend safety questionable and dividend growth less reliable. We feel that our investment philosophy sets us up well to endure a wide range of markets, and this choppy quarter is a good example. Our portfolios are tilted towards companies we judge to be less vulnerable to tariff increases. We believe the portfolios remain positioned to provide high and rising income for our clients over the long term.

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