Navigating Uncertainty: A Perspective on Market Volatility

The recent increased volatility as markets react to headline news—positive and negative—has rattled many equity investors.

Volatility, in and of itself, is not important to our investment process at Hennessy Funds. We understand that historically, long-term oriented investors who remain patient and stay invested should successfully weather today’s short-term market movements. Uncertainty, on the other hand, can be challenging.

“Uncertainty in economic policy, fiscal policy, interest rate policy, global trade, supply chains, and tariffs can be very disruptive. While it appears that tariffs may moderate as parties negotiate terms, heightened volatility could continue in the near term,” says Ryan Kelley, Chief Investment Officer of Hennessy Funds.

During this time, Hennessy Funds’ shareholders can rely on the insights of our experienced portfolio management team, as they offer thoughts on the following key sectors. 

Small/Mid Cap Companies. Smaller companies are generally domestically focused and may not be as susceptible to the potentially rising cost of global goods resulting from increased tariffs. Many U.S. mid-caps are construction and industrial companies that could benefit from the onshoring of manufacturing. Potentially lower barriers to merger and acquisition (M&A) activity, reduced regulatory costs and the potential for lower corporate taxes could be beneficial to smaller companies.

Importantly, during periods of increased volatility, small and mid-cap stocks may fall faster than larger cap companies, but often they rebound stronger and earlier as well. 

Utilities/Energy. In general, companies in the Utilities sector tend to be more defensive than other sectors and may be insulated from tariffs as it relates to a utility’s primary energy inputs. Dividends paid by utilities appear largely intact in our opinion.

The U.S. has ample supplies of natural gas, wind, sunshine and coal that would not be subject to tariffs. Reciprocal tariffs on U.S. liquefied natural gas exports may be possible but not likely as they satisfy a critical energy need overseas. Ultimately, we believe a mix of foreign buyers may choose to expand LNG purchases while others may reduce LNG purchases, resulting in a limited impact on overall U.S. LNG export volume.  

Financials. We believe any easing of regulatory constraints and long-term pro-growth policies could benefit the Financials sector over time. Many companies in the sector offer strong balance sheets, solid asset quality, and improving profitability. With a more favorable interest rate environment, and potential for price/earnings expansion, earnings growth, and increased M&A transactions, we believe Financials could benefit. Importantly, these companies have historically adapted to changes in their various operating environments, and today is no different.

International. We believe Japan’s market has shown resilience over the past several months, with the economy largely on course for first-quarter growth. Investor sentiment toward Japan has been buoyed by positive developments including Berkshire Hathaway’s increased investment in Japanese trading houses, signaling confidence in Japan’s economic growth. Also, valuations of Japanese equities look more attractive compared to the U.S. and Europe.

We believe the uncertainty has had a limited impact on many Japanese companies that are not involved in manufacturing or have strong pricing power and well-established value chains within the U.S., which helps mitigate tariff risks. There are also many domestically focused Japanese companies that will benefit from a stronger Japanese economy.

Looking Ahead

We continually monitor economic and market developments. Having invested through many cycles, we have successfully faced numerous macroeconomic challenges. As events unfold in the coming months, we’ll share our perspectives in navigating the investment landscape in our Distinct Advantage newsletter. Please subscribe here.

For our investors, our message remains the same: We strongly emphasize maintaining a long-term mindset and a diversified portfolio. Be assured that our long-tenured management teams take a time-tested investment approach to their high-conviction portfolios and are always mindful of downside risk.