Equity, currency, and bond markets have been in turmoil since early April, triggered by Donald Trump’s escalation of tariffs on all US trading partners.
The new tariffs, which average 20-25%, vastly exceeded market expectations, are significantly higher than the 4.6% trade-weighted tariffs on US exports. In 2023, US tariffs on imports were around 2.2%. Negative surprises like this often lead to sharp market reactions.
After a ‘measured’ decline in US stocks last Thursday, risk markets saw dramatic declines by Friday and Monday. Sub-investment-grade corporate bonds and loans were pressured, even as government bonds rose. Emerging market and commodity-related currencies weakened; the Australian Dollar dropped 4% against the Pound on Monday.
Last Friday marked a shift from normal buying and selling to a ‘capitulation’—a liquidity squeeze where forced sellers flood the market. This happens when speculative capital markets, relying on borrowed money, experience margin calls as asset prices fall. These forced sales create extreme market imbalances, driving prices lower and affecting other asset classes, such as gold and government bonds.
More Drama Is Expected
The situation escalated today, when additional tariffs took effect. Many countries, including Vietnam, are attempting to negotiate, but Trump’s economic adviser Peter Navarro suggests these efforts won’t suffice.
Retaliation is already underway. China plans to impose 34% tariffs on all US goods starting on April 10, while also restricting exports of rare earths. Trump has threatened to raise tariffs further to 104%, criticising Beijing’s response. Europe is also preparing a reaction, which may include extending trade barriers to IT services if negotiations fail.
Understandably, investors are growing increasingly nervous about rising uncertainty. Trump’s ongoing negotiation deadlines, with high-stakes “hardball” tactics, keep risk levels elevated. Markets briefly rose on rumours of a tariff suspension, only to fall again when the news proved untrue.
Where Might Markets Find Good News?
The unexpected tariff increases have led analysts to revise economic growth and corporate profit forecasts. JP Morgan now predicts US growth will contract by -0.3% year-on-year, with Canada hit hardest at -0.8%. Goldman Sachs and Morgan Stanley have similarly adjusted their outlooks.
Despite earlier optimism, investors are now more pessimistic. Fears of a global recession dominate, with global equities down 15% since February. However, Trump’s policies could eventually lead to positive interventions and mitigate some economic challenges.
China and Europe (including the UK) may avoid recessions, though China’s growth will likely fall short of its 5% target. While the US Fed faces a tough decision, it may cut rates if market stress intensifies. Other central banks are also poised to act more quickly than expected.
Domestically, Trump faces growing pressure from supporters who are concerned about inflation, recession, and falling asset values. Republican Senators are considering a bill to declare the tariffs unconstitutional, and even Elon Musk has criticised Trump’s trade policies.
Sticking to Investing Principles
During periods of market volatility like the past few trading days, it’s crucial to focus on time-tested investing principles. While markets generally trend upward over time, they seldom do so in a straight line. The price investors pay for the outperformance of stocks over safer assets like bonds and cash is short-term volatility. Long-term stock performance benefits those who resist the urge to panic, avoid locking in losses by selling after sharp declines. Staying calm in times of market turmoil is key because the best days often follow the worst ones. Missing these rebounds can significantly affect long-term returns, not just by missing the initial rally, but by missing out on the future growth that builds on those positive days.
If you would like to speak to The Financial Planning Group about your investment situation, please contact your user adviser or email enquiries@fpgonline.co.uk
