Five Things to Know About Navigating Volatility In Financial Markets

Less than 90 days into his presidency, on April 2, 2025, President Trump enacted the most significant U.S. tariffs in a century catalyzing substantial policy, interest rate, and inflation uncertainty. A week later the President authorized a 90 day pause amid a selloff in U.S. Treasury bonds and/or apparent willingness from many global leaders to avoid a trade war. As markets rush to digest these policy shifts, chatter is elevated but as long-term investors, chasing headlines risks losing the plot. From a macroeconomic, geopolitical and trade policy perspective, and amid rising protectionism, shifting geopolitical ties, higher volatility and stickier inflation, we now sit firmly in the new investing regime that Henry McVey has been describing for years. This year, our Global Macro & Asset Allocation team expects higher inflation and slower global growth with a potential recession in the U.S., while strong fiscal stimulus supports growth in Eurozone and China. But, unlike bear markets resulting from structural imbalances, financial bubbles or tightening financial conditions, the recent shift in tariff policy has acted as the catalyst for an event-driven dislocation, which could prove short lived if policy does not expand or result in a deterioration of fundamentals.

EXHIBIT 1: U.S. Bear Markets and Recoveries Since the 1800s

EXHIBIT 2: Vintage Returns Analysis During Times of Panic

1. Markets Can Move Faster Than Fundamentals

Our U.S. Macro team has shared that despite the caution reflected in liquid markets, U.S. fundamentals remain on more solid footing as interest rates despite recent moves remain below the January 2025 peak, private sector balance sheets are healthy, and the overall consumer is in decent shape. Low rates and low oil prices should support growth, but tariffs are driving elevated uncertainty and inflation, which will dent growth. At KKR, we continue to focus on long-term performance drivers e.g., steady deployment, smart diversification, operational improvement and a through cycle, thematic investing approach. After being priced to perfection, public equity markets are down but most expected some sort of correction this year. Prior periods of dislocation e.g., Global Financial Crisis, Covid etc., ended up being top vintage years and patient investors were rewarded handsomely. During periods of dislocation like these we continue to prepare our portfolio companies for potential challenges and anticipate opportunities to lean into our long-term investment themes. Private Markets have historically been able to outperform during periods of slower growth and elevated financial market volatility.

EXHIBIT 3: Since the Inauguration, Both Oil and the 10-Year Yield Have Fallen Meaningfully

EXHIBIT 4: Unlike in the Past, Consumers and Corporations Are Not Overleveraged

EXHIBIT 5: Unemployment Levels Remain Low

2. A Geopolitical Transition Is Underway

At the heart of this event-driven dislocation is the transition to a new geopolitical regime. General David Petraeus and Vance Serchuk have long asserted that the world has shifted from an era of Benign Globalization to one increasingly defined by Great Power Competition and regionalized trade networks. The Trump Administration’s tariff-driven trade policies underscore this shift, reflecting a broader reevaluation of America’s role in global commerce.

Indeed, the imposition of widespread tariffs could potentially end a near century long era of free trade. Globally economists today generally favor free trade as it promotes efficiency, lowers consumer prices, and encourages long-term growth through specialization. Free trade enables countries to focus on what they do best and trade for the rest, benefiting most consumers. On the other hand, free trade can lead to creation of deficits and persistent trade deficits may represent a steady transfer of national wealth to other countries, raising concerns about the national debt and long-term economic sovereignty. That said, concerning tariffs, economists warn that tariffs often lead to higher prices, reduced efficiency, trade retaliation, and importantly slower growth. Tariff proponents argue that raising import costs to protect domestic industries can work to repatriate some of that wealth. These concerns are not just theoretical. For context, at the end of 2024, the U.S. national debt stood at ~$35.6 trillion — or ~123% of GDP — reflecting decades of annual spending that has consistently outpaced federal revenue.

To finance these deficits, the government borrows by selling Treasury bonds, bills, and other securities to domestic and foreign investors. Foreign governments, in fact, own roughly 33% of U.S. debt, adding a layer of complexity to tariff negotiations and economic diplomacy. The U.S. also ran a $1.2 trillion goods trade deficit in 2024, partially offset by a $293 billion services surplus. This annual trade deficit, which represents about 3% of GDP, contributes to the broader national debt as the country effectively borrows from abroad to finance its imports. Importantly, though often overlooked in media narratives, there is broad bipartisan recognition of the need to address these challenges. Policymakers generally support efforts to reduce the national debt, prioritize domestic manufacturing in strategic sectors, and catalyze job creation.

3. Slower, But Still Positive Growth

President Trump’s Liberation Day plan shocked markets with its boldness—marking the most aggressive tariff hike in over a century and the largest effective tax increase on Americans since 1968. Framed as a “declaration of economic independence,” the policy aims to reduce trade deficits and repatriate wealth but introduces material macroeconomic headwinds. We expect a prolonged period of elevated tariffs and volatile negotiations rather than a return to the pre-2020 norm, where the weighted average tariff rate was 4%.

We estimate that every 10 percentage point increase in the average tariff rate applied to U.S. imports will translate into roughly a one-percentage point headwind to GDP growth (over one year) and a one percentage point uplift to CPI price levels (over two years). Today, the U.S. outlook is uniquely challenged by both tariff-related shocks and fiscal tightening via DOGE, whereas Europe and China are leaning into stimulus—signaling a shift in global growth leadership toward Asia and Europe. As a result, we see U.S. growth slowing to stall speed in 2025, with only a modest rebound in 2026. That said, we remain measured—not bearish—given solid U.S. fundamentals: resilient productivity, healthy consumers, stable corporate balance sheets, and no housing inventory overhang.

On inflation, we now see price pressures remaining more elevated than previously anticipated, with goods inflation likely experiencing stronger pass-through effects. While we still expect long-term interest rates to trend lower, they may struggle to stay meaningfully below the current levels as markets adjust to a stickier inflation environment. The Federal Reserve’s path forward has become more complex. For now, we continue to expect moderate easing this year (two cuts), but we now see a slightly more accommodative stance unfolding the following year.

However, the outlook is dynamic and growth hinges on key decisions. Growth could be better than expected if the pause on tariffs becomes permanent and the scope narrows considerably. Additional upside surprises might include Congress delivering fiscal stimulus or significant deregulatory tailwinds emerging. On the other hand, growth could disappoint from an escalation in U.S.-China tensions to deeper tariff entrenchment negatively impacting U.S. productivity growth.

4. Volatility Is An Opportunity To Reposition

The VIX has jumped to 30 from 17 just a month ago, signaling elevated market volatility. Historically, such spikes have rewarded patient investors—especially those allocating to private markets. When the VIX is in the 30–40 range, typically coinciding with average monthly market declines of 2%, the S&P 500 has historically tended to rebound within six months. In parallel, when the S&P 500 falls more than 5%, generic U.S. Private Equity has delivered an average excess return of nearly 10% over three years. Indeed, we see scope for the expansion of illiquidity premium over the next 5 years. Strong Private Equity vintages tend to emerge during periods marked by capital market dislocation, limited liquidity, relatively low buyout dry powder, and attractive entry valuations—particularly versus public multiples.

Tariffs and immigration reform under Trump’s “America First” agenda add further inflationary pressures. In this inflationary regime, we also prioritize assets with controllable outcomes and collateral-backed cash flows. Infrastructure, Real Estate, and Asset-Based Finance are particularly well-positioned, benefiting from inflation-linked income and offering downside protection. Private Real Assets have outperformed public benchmarks by 4–9% when the S&P 500 has fallen more than 5%, with Infrastructure offering exposure to the critical services supporting everyday life with reliable inflation hedges, downside protection as well as upside potential, and Real Estate benefiting from stable GDP, lower rates, and structural undersupply especially in the housing sector. Real Estate has also already seen significant repricing, offering attractive entry points. While Real Estate Credit remains particularly compelling, equity opportunities—especially in housing—are seeing renewed momentum, supported by double-digit year-over-year transaction volume growth.

Moreover, despite elevated uncertainty around Fed policy and rising geopolitical risks, we believe credit markets will bend, not break, thanks to ample capital on the sidelines. Worth noting, the post Liberation Day market sell-off was much more muted in liquid credit than in public equities. While spreads widened, the move was contained, reinforcing the idea that credit can serve as a relative safe harbor amid volatility. That said, duration management is key, and a balanced allocation across fixed- and floating-rate structures—through a mix of Direct Lending and Asset-Based Finance—can provide resilience and flexibility.

EXHIBIT 6: The Best Time To Lean Into Private Equity Is Precisely When Public Equities Are Underperforming

Avg. 3yr Annualized Excess Total Return of U.S. Private Equity Relative to S&P 500 in Various Public Market Return Regimes

5. High Conviction Opportunities Remain

Recent trade events and rising geopolitical tensions reinforce our Regime Change thesis—defined by persistently large fiscal deficits, a messier energy transition, blurred lines between economic and national security and sticky inflation now amplified by tariffs. As trade relationships realign, capital is shifting toward domestic consumption stories, strategic industries, and inflation-resilient assets. We also expect a narrowing of returns across asset classes or a flatter efficient frontier driving a greater need to incorporate asset classes that enhance portfolio diversification. As a result, we are leaning into:

• Security of Everything/Resiliency: Rising geopolitical tensions, cyber threats, and shifting supply chains are driving both governments and CEOs to prioritize corporate security and resilience across infrastructure, energy, data, transportation, and pharmaceuticals. Additionally, amid shifts in U.S. policy, many countries are seeking to bolster their own sovereign capabilities in areas like defense and intelligence. Investors can tap into this theme through Real Assets strategies focused on verticals like data centers, industrial facilities, and workforce/affordable housing. Private Equity offers additional exposure via cybersecurity, aerospace and defense, and industrial automation investments.
• Shifting Trade Patterns in Asia: Amid the disruption between U.S.-China trade, we are witnessing an increase in intra-regional Asia trade. On the one hand, this includes India and Southeast Asia positioning themselves as alternatives for exclusive manufacturing in China; on the other, we also see increased push for deepening trade connectivity within Asia, although this is complicated by geopolitics—in particular, frictions between China and other major Asian economies, including Japan, India, Australia, Vietnam and the Philippines. Key investment areas include transportation infrastructure, subsea cables, data centers, and energy transmission. This intra-regional growth also favors local banks and expands non-bank lending, with significant opportunities in Liquid and Private Credit. India and Southeast Asia—especially the Philippines, Indonesia, and Vietnam—stand to gain substantially from these trends.
• Workforce Productivity: The need for lifelong learning and worker retraining is reaching a historic high, driven by rapid tech disruption, pandemic-era learning loss, and a shrinking labor force due to Boomer retirements and declining immigration. As employers face growing skill gaps, there's rising demand for platforms that identify skill adjacencies, enable upskilling, and boost productivity. We see compelling investment opportunities across labor market analytics, job-matching tools, skills-based training, and workflow automation.
• Capital Heavy to Capital Light: More public firms are going ‘private’ through aggressive buybacks and strategic capital allocation. They’re divesting heavy assets and securitizing to fund these moves, while reducing cyclical exposure for more sustainable earnings and returns. Executives are focusing on reducing cyclical components to build more sustainable businesses with clearer earnings and returns. This creates compelling opportunities to invest in either the equity of transitioning companies or the assets they sell.

Conclusion

The precise level of tariffs is difficult to predict, but we believe the overarching direction is clear: under President Trump, a more assertive, deal-driven approach to trade policy is likely to result in elevated tariff levels compared to the Biden era. Positioning portfolios for through cycle performance despite periods of heightened volatility or potential recessions is the key. Thoughtful diversification is critical and private market strategies have historically helped investors incorporate additional downside protection, volatility mitigation, inflation hedging, and return amplification – particularly in complicated environments like these.