President Donald Trump announced sweeping tariffs that will reshape trade relations with the United States. The new tariff regime is more severe than expected, and extraordinary both in terms of scale and how they were calculated. Although markets were initially sceptical about the use of tariffs and saw them more as a tool to get a better deal for the US they have now switched and we are seeing the real impact on business and markets.
MARKET REACTION
- Equity markets across the globe have sold off sharply due to concerns over the impact of the tariffs on economic growth and inflation.
- In the short-term, companies with significant export revenues have been hardest hit, while domestic and service-based companies have been slightly more resilient.
- Somewhat surprisingly, the US dollar initially weakened against most G10 currencies (the opposite has generally happened when tariffs were announced), but is now exhibiting some strength, reasserting itself as more of a safe-haven currency.
OUR VIEW
Bond markets (lending) have been relatively resilient with only a modest uptick in the reward for taking more risk.
- We cannot rule out the possibility of further declines however we are also very wary of potentially missing any sharp rebounds in the market that historically have occurred post periods of extreme market dislocation. Sharp recoveries have typically followed sudden sell-offs in the past.
- Our experience in managing money through periods of extreme market volatility leads us to take a medium-term view, rather than attempt to try to time markets, which we believe is fraught with risk.
- We accept that a degree of short-term paralysis to economic growth is likely, however business and consumer confidence should pick up as a degree of clarity on trade arrangements starts to reappear.
- President Trump has left the door open for tariff negotiations and we can likely expect revisions, exemptions and retractions in the current position.
Looking ahead we should not forget that market confidence could be quite swiftly restored by some toning down of Trump’s agenda or by stimulative actions from central banks.
DATA FROM THE PAST
Please remember that past performance is not a guarantee of future results.
We do know that markets (S&P 500 in this case) have delivered an average return of 10% per annum over a long period of time. But what has happened during the year, every year since 1928?
It can be seen from the image below that in 95% of the years the market, at its worst, has been down at least 5%. We know this as volatility as it isn’t permanent but it is a reaction to perceived risks. In 30-plus years of advising clients this is 100% unsettling but it is, at the same time, almost routine. We should expect markets to tumble as this is part and parcel of the mechanism that determines a fair price for shares and other instruments.
Interestingly, as shown, we are currently in the 63% category. So what we are seeing now is relatively normal…well at least 63% normal!
STOCK MARKET LOSSES: 1928-2021
BEST TRADING DAYS
We need to be mindful too that when markets fall sharply, they are often followed by markets rising sharply. For example, if we consider the seven of the ten best trading days in the last twenty years we can see that they were within two weeks of the worst trading days.
FUND MANAGERS ARE NOT BETTING ON RED OR BLACK
It is often thought that the job of a fund manager is to second guess the market, get out before a fall and then get back in before a rise. This is an almost impossible task and it is unfair to measure them by this yardstick. It is better that we think of them as making good quality decisions about companies, sometimes the value of those companies falls and more often than not, over time the value rises much more than they have fallen. So their job, the managers, is to spend some of their cash when there is an opportunity and sell some share where there is some obvious value but mostly to buy what they are most convinced will make money over time and hold that share (or shares) over time to achieve maximum returns.
If you have any questions or comments please don’t hesitate to contact NBL.
