Trump creates a wave of volatility

Donald Trump formally signed an executive order on April 2nd, which he referred to as “Liberation Day”, to introduce new tariffs on trading partners.  There was considerable uncertainty and speculation around how high and how broad these tariffs would be, which has resulted in significant market volatility this year and particularly in the last few weeks ahead of the announcement.

Since the announcement, the market reaction has been significant, indicating uncertainty as to whether the tariffs could be far more disruptive than initially thought.

This has led to sharp sell-offs across most risk assets, with US equity markets being the worst impacted.  

Focusing on the announcement itself, there are still many unknowns around the specifics of Trump’s plan.  Also, it is still too early to know how other countries will react and to what extent, although China has announced retaliatory tariffs today.

So, what does this mean for growth and inflation?  

If these tariffs remain in place, it is possible we could see a decline in economic growth as well as higher inflation both in the US and abroad.  This would likely increase the probability of a recession and negatively impact employment.  Obviously, the problem is we are dealing with a President who is notoriously difficult to predict, and questions remain as to:

1. How long will the tariffs be in place
2. Will countries come to the bargaining table to negotiate a mutually favourable deal or retaliate further?
3. How much pain is Trump willing to endure in terms of stock market losses?
4. Will Trump pivot if GDP growth weakens and/or inflation rises meaningfully?

At this point, the only thing we can say for sure is that we are at maximum uncertainty, and this has led to extreme volatility over the past few days and weeks.   

The day after the announcement, the S&P 500 sank 4.84% which was the worst single day drop since Covid.  The US equity markets have again opened up strongly down and European markets, including the UK, are also trading sharply lower.   Most markets now having entered correction territory with losses over 10% since the market peak in mid-February.  
It worth noting that at present, regions like the UK, Europe and Japan have proved to be more defensive than the US with smaller losses since the February peaks.  This has helped limit some of the overall losses.

Encouragingly, we have seen better returns in more traditional safe havens and alternatives.  Government bonds, including UK Gilts and US Treasuries, have posted gains.  In addition, exposure to short duration investment grade bonds have generally helped protect capital.  

Within alternatives, infrastructure and real estate have held up reasonably well, while we have seen gold prices rally and break through $3,000 an ounce. 

These exposures have helped soften the blow in diversified portfolios by providing some protection against the broad-based stock market declines.
It is also important to note that we have seen a strong period for investment markets since October 2023.

We could therefore consider that, for longer-term investors, this sell-off is giving up some of the gains, rather than anything more dramatic at this stage.
Reflecting on market history can be beneficial during heightened volatility.  If we consider the calendar year performance of the UK’s FTSE AllShare since 1986, we can see that over 39 years, we have experienced double-digit (i.e. more than 10%) sell-offs in 28 of those years.  The average peak-to-trough drop has been 15%.  However, markets have been positive in 27 of those 39 years (Source: FTSE, LSEG DataStream, JP Morgan).  

In this respect, we can consider large sell-offs as a feature of investment markets, rather than a fault in them.

We also need to reflect on the fact that often market corrections, or bear markets, are followed by periods of recovery, bull markets, which are much longer and of greater magnitude than the original fall.  
For example, over the initial Covid period in February 2020, the main US market, the S&P500, fell by 34% over one month, however, the same market recovered 103% over a 22 month period.  The problems of 2022 saw a fall of 27% over 9 months, but the market went on to recover 57% over 27 months to the end of last year.

This is a highly fluid situation and there are several factors which may impact how the situation evolves, however, we believe that a well diversified investment strategy is a very prudent approach, protecting against the worst of the downside, whilst also creating opportunities to participate in the upside, when it comes.

We will continue to monitor the situation and provide updates, if appropriate, as things unfold.

If you have any questions, concerns or require any advice, please email info@greenarch.uk.