Tariff retreat is a relief, but the calm may be short-lived
Markets jumped on news of a delay to the punitive tariffs set out on April 2nd. But, a “baseline” tariff of 10% remains in place for most countries and confidence remains fragile. We are prepared for more turbulence ahead.
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The market moved from despair to relief on Wednesday 9th April as President Trump announced a 90-day delay on implementing reciprocal tariffs on all trading partners except China, opening the door to negotiations. Markets rallied strongly in response, offsetting a significant amount of the losses since his “Liberation Day” announcement on April 2nd, although they have since pulled back again in yesterday’s US and this morning’s Asian trading.
Not out of the woods yet
It is unclear whether the about turn is part of President Trump’s strategy to improve his hand at the trade negotiating table or a capitulation in the face of increasingly negative public opinion and, in Trump’s own words, “yippy” investment markets. We believe he was ultimately less concerned about the equity market turmoil, but was more unsettled by the rapid sell off and disruption seen in the US treasury market. In either event, it appears that a “Trump Put” on market falls may suggest a limited tolerance for the market stress associated with some of his polices. Meanwhile, lower tariffs than initially announced, if upheld, would translate to a less pronounced negative impact on growth (down) and inflation (up) than previously forecast.
Having said this, we continue to see the risk of a material economic slowdown and potential recession as having increased. The ability for countries to negotiate terms to the President’s satisfaction in such a short time frame is an open question. Universal tariffs of 10% are still in effect for most countries, while higher tariffs for Mexico and Canada, as well as auto imports and steel and aluminium, remain. The exception is China, which is now in a trade war with the US and faces a tariff of 145% on exports to the US, a number that seems to change almost daily. While both sides continue to express a willingness for talks, the damage to trade, as well as relations between the two nations, is likely to be substantial and difficult to resolve. Neither side is currently backing down which further unsettled markets overnight.
A further concern is the damage to consumer and business confidence from the uncertainty created by recent headlines. Consumer sentiment indicators had already fallen significantly to low levels in March, and have likely fallen further this month, despite positive aggregate real wage growth. Business confidence, meanwhile, has also declined significantly, with many companies likely to cut their profit forecasts as a result of increased margin pressures, supply chain uncertainty and pausing of capital expenditure plans. These "second order" impacts will probably be at least as significant as the direct impacts of tariffs themselves, if not more so, while delaying any potential cyclical recovery from the current slowdown.
Finally, it is worth looking at all of President Trump’s actions since inauguration, which in many cases have largely been unhelpful in inspiring confidence. His disregard for multilateral organisations such as the WTO and WHO, alongside a more transactional approach to diplomacy and the resolution of global conflicts, will likely lead to further polarisation and deglobalisation. His attacks on domestic law and monetary authorities, such as federal courts and the Federal Reserve, as well as the unprecedented use of executive orders over congressional approval to drive large parts of his policy, are being increasingly interpreted as attempts to undermine any challenge to his executive authority. We have also yet to see many of the pro-growth parts of his campaign agenda come to fruition, including deregulation and tax cuts, although we may hear more on these in the coming months. Put together, these are further indications that perhaps the only certainty in the near term is further uncertainty.
How to navigate markets in times of uncertainty
As Howard Marks (of Oaktree fame) commented in a recent memo, the right investment action to take relies not just on an assessment of changes to the fundamental economic backdrop but also the appropriateness of the market’s response to date. Looking ahead we expect lower growth, higher inflation and more volatile market responses, and in such a febrile environment taking no action can often be the best course of action. However, market volatility can also provide opportunities to tactically add risk at times of extreme fear and reduce it at peak optimism. In doing so, it is important to acknowledge that the ability to call the absolute bottom and top of markets is minimal, so shifting exposure incrementally rather than in one go is often the best strategy in such circumstances.
As an example, we recently communicated that in the market falls prior to Wednesday’s rally we were seeing opportunities to add back to risk assets, having reduced our credit exposure in the second half of 2024 and subsequently our equity exposure in January of this year. Following Wednesday’s market rally and despite yesterday’s retreat, valuations now reflect a more optimistic backdrop than perhaps the aforementioned risks warrant, reducing the attraction of adding to either equity or credit. If we see another sell-off we would consider adding, assuming no commensurate deterioration in our economic outlook. Conversely, if markets rally significantly, we might reduce equity exposure in favour of other investments that would help protect portfolios in the event of rising risk, such as government bonds, gold and cash.
We believe it is important to think longer term, but it is often hardest to do so during periods of extreme volatility and noise. History shows that the ability to compound and grow ‘real’ wealth (after inflation) over horizons greater than ten years increases the longer the portfolio remains fully invested in markets. Doing so whilst owning a diversified set of investments commensurate with your investment time horizon, also helps to manage volatility at such times as we have just witnessed.
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