Jim Caron on Volatile Market Strategy and Global Portfolio Diversification

With market volatility back in the spotlight, investors are searching for clarity amid price swings, geopolitical tensions, and uncertainty around interest rates. Jim Caron, CIO of the Portfolio Solutions Group at Morgan Stanley Investment Management, calls this moment the “Super Bowl” for global macro investors and says it’s time for a new volatile market strategy.

From evaluating the inflationary debate and the role of US Treasuries to reassessing equity allocations. Jim offers a nuanced framework for navigating this uncertainty and shares how advisors and their clients can better navigate this increasingly unpredictable environment.

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Europe may soon find itself in the trade policy hotspot with new US tariffs on the table. While investors might think markets have priced in these developments, Jim suggests that even well-signaled policy changes can introduce short-term volatility and price swings. These are potentially fruitful moments for a savvy, volatile market strategy.

“In the past, European markets significantly underperformed US markets” says Jim. “Now our equity portfolios heavily favor European equities due to their ability to implement fiscal and monetary stimulus, unlike the US, which faces limitations due to its high deficit. This, combined with trade policies, suggests that global growth will increasingly be driven by non-US economies, contributing more to overall global portfolio returns.”

European assets, from equities to fixed income, offer new opportunities. Jim's urges professionals to rebalance portfolios, considering a shift from dominant US large-cap growth to European large-cap value in a market where local currencies are poised to appreciate. “This is a great time for us to think about a globally diversified portfolio. We haven’t had to do that for the last fifteen years, but going forward, diversification beyond the US will matter a lot.”

Tariff-driven volatility may offer timely entry points into undervalued European markets, especially for those looking to diversify exposure away from a concentrated US portfolio.

The inflationary implications of tariffs remain hotly debated. Jim offers a measured perspective. “Tariffs can cause a one-off price jump, but unless there’s a big monetary policy reaction or significant supply chain disruption, the long-term inflation impact should be limited,” he notes.

However, he cautions that this is not purely academic. Persistent supply chain friction or retaliatory measures could lead to more than a short-term uptick in prices. Jim's message is clear for advisors crafting a volatile market strategy: “We are now entering a period where inflation may stay above the Fed’s target for longer. Even sideways movement or a mild trend higher is a big departure from the past forty years of low and stable inflation.”

This new era demands more active management of both risk and growth. Advisors should prepare for the possibility of short-term inflation spikes and recognize that sustained supply chain challenges could lead to longer-term price pressures. Adjust interest rate, asset allocation strategies and watch monetary policy signals and trade-related developments for their impact on portfolios accordingly.

President Trump’s fiscal strategy hinges on a “pro-growth” budget that pairs tax relief with deficit control. The key mechanism for funding these tax cuts? Tariffs.

While often seen as standalone trade measures, tariffs could be strategically used to generate revenue, helping to balance the books while advancing a looser fiscal stance. This marks a shift in how advisors and investors should interpret trade policy, not just as a geopolitical tool but as a fiscal lever tied to broader economic objectives.

Jim believes this linkage between tariffs and tax reform is set to become a defining market narrative. Starting in March, investors should watch closely to see which sectors stand to benefit most from this alignment. As the tariff conversation evolves, so too will market expectations, particularly around the dollar, US Treasuries, and domestically exposed industries. For advisors navigating these shifts, understanding the fiscal backdrop is critical to identifying both short-term risks and long-term opportunities.

Despite headlines about trade wars and geopolitical risk, Jim remains constructive on global growth. The current climate is a turning point where active management can finally prove its value after years of underperformance relative to passive investing. “Correlations between equity and bond returns are at historic highs. That means traditional balanced portfolios aren’t as diversified as they used to be. Passive fixed income, for example, no longer offers the same hedge against equity risk,” he says.

Investors should consider actively managed funds in both fixed-income and equity allocations. Jim's highlights the value of looking beyond headline indexes. “Now, it’s about getting more sector- or factor-specific, exploring mid-caps, materials, industrials, and even healthcare at certain points in the cycle. Factor risk exposures now matter a whole lot.”

He also sees opportunities in private markets and alternative investments. Adding a third asset class, such as private equity or credit, can reduce portfolio risk if properly managed.

“Private markets generate returns differently,” Jim notes. “They’re less tied to the business cycle and more about capturing enterprise value.”

Still, he cautioned that access, liquidity, and education are critical. What works for an ultra-high-net-worth client may not be suitable for a retail investor. And as broker-dealers expand access to alternatives, advisors must ensure their clients understand what they’re buying—and why.

Jim Caron’s perspective underscores that we are in a period of structural market change, not just another cycle of volatility. Here are key considerations for investment professionals and advisors:

• Expect short-term volatility around tariff actions but see these as chances to rotate into underexposed regions like Europe.
• Monitor inflation risks closely, recognizing that tariffs and supply chain changes could affect short- and long-term price stability.
• Reevaluate traditional portfolios as correlations rise and passive hedges weaken. Consider active management to capture risk-adjusted returns better.
• Diversify globally and across asset classes, integrating European equities, fixed income, and alternatives like private markets for proper risk balance.
• Leverage trusted expertise and tailored strategies to guide clients through the increasing complexity of today’s volatile market.

By taking a proactive, diversified, and informed approach, investment professionals can turn volatility from a source of risk into a catalyst for opportunity.

Navigate market volatility with confidence. Direct Advisory Suite equips you with the research and tools to act on insights like Jim Caron’s, helping you uncover global diversification and portfolio opportunities for your clients.