Markets are perpetually in motion, rising and falling with the tides of political trends, new technologies, and macroeconomic forces. Those shifts feel particularly acute right now as the global economy reacts to the new U.S. administration, the specter of tariffs, and the roller coaster of policy announcements and reversals. This makes it a good time to remind ourselves that, throughout history, markets have consistently rewarded long-term investors who have maintained diversified portfolios during periods of volatility.
That doesn’t mean it’s always easy. Sticking to your long-term plan through periods of uncertainty can feel uncomfortable, especially as markets fluctuate due to external catalysts such as political shifts or inflationary concerns. When we take a step back and examine decades of market history, we can see that these periods of rotation can create significant opportunities – but they also pose risks for investors who try to chase performance or time the market.
“Guns or Butter”
The ebb and flow of different sectors was prominent during World War II, leading to a new phrase emerging into the popular lexicon: “guns or butter.”[1] This economic concept became a classic example used to describe the inherent trade-offs that governments and economies face when prioritizing between military spending (guns) and the production of consumer goods (butter).
During the early years of the war, the U.S. economy shifted dramatically toward defense production. Manufacturing plants that had once produced automobiles and household goods were repurposed to build tanks, planes, and ammunition. This massive shift in industrial output, accompanied by increased government spending, drove growth in defense-related sectors while consumer goods industries contracted. As the war came to a close, the economy quickly rotated again, with resources shifting back toward consumer goods production, housing, and infrastructure development.
Investors who focused solely on consumer goods companies or defense sectors likely saw portfolios struggle as the wartime economy evolved. No single sector or political tilt remains in favor indefinitely. Diversification can smooth out portfolio performance and limit downside volatility as markets adjust quickly.
Policy Whiplash and Sector Shifts
Fast forwarding to today, we are experiencing another disruptive period driven by policy changes, shifting consumer behavior, and geopolitical uncertainty.
Potential tariffs and trade agreements are already impacting global supply chains. Industries that rely heavily on international trade, such as technology and consumer goods, may face a period of volatility. After years of market leadership, tech stocks are down almost 5% so far in 2025, having returned more than 30% in each of the prior two years.[2] At the same time, sectors like energy, industrials, and domestic manufacturing may benefit from shifts toward onshoring and infrastructure spending. The energy sector was in the bottom three worst-performing sectors in both 2023 and 2024, but has been the top performer at +1.0% so far in 2025.[3] In Europe, defense spending is on the rise, benefitting industries that had been out of favor in previous years, including industrial companies and commodity producers.
Rising interest rates have also influenced the performance of different sectors. Growth stocks, particularly in the tech sector, thrived in the low interest-rate environment of the past decade, however, higher rates have raised questions about the sustainability of these valuations. Meanwhile, sectors that benefit from higher rates, such as financials and bonds, have seen renewed interest from investors seeking stability and income.
A Steady Strategy
While the turmoil of the current political environment may feel novel, market cycles and sector rotations are both normal and inevitable. These rotations can sometimes appear obvious in hindsight, but the reality is that the future is unpredictable, and there is always a multitude of potential outcomes.
Instead of attempting to chase performance by jumping in and out of different sectors, at North Berkeley, we pursue a more disciplined investment approach centered around diversification that blends both stock and bond allocations. We then layer on regular portfolio rebalancing that allows us to adapt to market shifts and maintain our long-term allocations, systematically selling high and buying low without making speculative bets. This strategy can help reduce normal feelings of anxiety and discomfort during periods of volatility and ground our approach with a longer-term perspective and structured process.
Whether it’s the wartime economy of the 1940s, the tech boom and bust of the early 2000s, or today’s unfolding shift in geopolitical norms and alliances, market and sector rotations are a constant. Diversification and rebalancing are not a salve for all concerns and uncertainties in the current moment, but they can provide the most grounded pathway to build financial security over time.
Resources
[1] A Brief History Of Guns And Butter. FasterCapital
[2] A Stock Market Rotation Is Underway. Will It Last? Morningstar
[3] Visualizing the Top Performing S&P 500 Sectors in 2024. VisualCapitalist
