Market Reaction
Global equity markets have reacted negatively to President Trump’s significant increase in tariffs on imports into the United States. This reaction indicates that the initial announcement was worse than investors had expected.
The announced tariffs include a 34% rate on China, 24% on Japan and 20% on the European Union. The principle appears that the United States will impose tariffs of half the estimated trade barriers placed on US exports by their trading partners. Trading partners are specifically invited to negotiate, though the President stated change will require a lowering of existing trading barriers or more investment into the US (of which there has already been significant commitments).
Our Thoughts
Our initial thoughts are that if the announced tariffs are not altered, they will induce a global recession for which there must be an adjustment in the prices of equity and bond markets. We are seeing this today, with equity markets lower and bond prices higher. A recession would prompt a reduction in interest rates by Central banks around the world.
However, we believe that it is reasonable to expect some change from yesterday’s starting point – US Treasury Secretary Bessent alluded to this in his interview yesterday.
Our view is based on Trump’s focus on the stock market in his first term and his desire to generate strong economic growth in his second. Whilst the Trump market ‘put’ is weaker than before we believe, in the end, it will still exist. US households have a significant amount of their net worth in the US stock market and a prolonged bear market would undoubtedly hurt US consumption and domestic growth, hurting Trump’s objectives.
Policy Uncertainty
The question that investors do not know today is how long it will take for President Trump to change his position and by how much the position will change. This is relevant because the quicker and the greater reductions in measures will reduce the downward pressure on economic growth.
Furthermore, investors have yet to focus on the planned renewal of US corporation tax reliefs and financial services deregulation. US politicians are working on legislation that would extend the individual personal income tax cuts and the renew corporate tax breaks from the 2017 Tax Cuts and Jobs Act (TCJA). It is anticipated that deregulation will lead to an increase in bank lending to domestic corporate America and provide buyers of US Treasury bonds from freeing up the balance sheets of the large US banks.
Investors should also be mindful that during the Q4 2024 reporting season in January and February for the S&P 500, companies were already referencing uncertainty owing to the new administration’s economic policies. Analyst expectations for corporate earnings in Q1 2025 were therefore reset downwards, which will be helpful as Q1 reporting gets under way in the next week or so.
Market Volatility
Our portfolios are not immune from the fall out when equity prices decline, but non-US markets continue to fare better than US markets – even after today’s fall, the FTSE 100 is +4% in 2025 for example. Portfolio diversification is also helping, with bond investments delivering positive returns in 2025.
We appreciate that the situation is fast moving and uncertain, with media commentary adding to investor unease, but as we say, we believe there will be a willingness to find ‘deals’ as we go forward from here (and as we have already seen).
Market volatility is likely to remain high, but we keep in mind that investor sentiment, investor positioning and markets have already moved significantly in recent weeks.
Contact Us
If you have any questions, please do not hesitate to get in touch with a member of the Luna team.
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