Yet again, Trump has managed to surprise investment markets and create chaos. Plus, for the first time ever I have had to rewrite this update to accommodate developments whilst writing. Things are moving fast!
Chaos Again
Having read the FT this morning, the overwhelming consensus is that, following his tariff announcements on Wednesday, uncertainty is now higher than ever.
- Is it ‘The Art of the Deal’ and Trump employing his usual negotiating tactics, such that we can expect much of what he announced on Wednesday to be rolled back with ‘deals’ struck with individual countries?
- Is he just trying to raise taxes to fight the deficit and allow for greater tax breaks on income as the year goes on?
- Is he really trying to level the US trade deficit and bring manufacturing jobs back to the US?
The FT certainly did not give me the answer, and of course it could be a bit of all of this.
Whilst writing, the Chinese have come out and reciprocated with higher tariffs on US goods, so we now know how others are likely to react. We officially have a trade war and European equity indices, a relatively safe place so far this year, are heading down 5%. US markets look set for another bloody session.
There is more pain to come.
What is certain is that global equity markets don’t like this. Trump can’t shout down capital markets, nor complain that they are not wearing a suit or have not been thankful enough – they are very independently minded and very quick to work out cause and effect.
Hardest hit yesterday were US companies that manufacture abroad. Apple, which mostly assembles its iPhones in China, and Nike, which manufactures trainers in Vietnam, were down over 9% and 14% respectively as investors recognised the tight spot the tariffs would put these two businesses in. They either must push the extra costs of tariffs on their supply chains through to consumers in the US, who are already suffering after post Covid inflation, or accept punishing hits to their profit margins.
Of course, they could relocate their manufacturing to the US, but this would involve time and mean dismantling a supply chain for their products that has been deftly honed over decades to deliver a high-quality product at the lowest cost. No wonder Tim Cook was sucking up to Trump at the inauguration when he knew tariffs would be on the agenda. So far, Tim’s efforts look unrequited!
It looks like today will see more widespread pain as relations with the US deteriorate and global trade gets more expensive. This might ultimately be good for the planet and good for the US, but short term it is definitely bad for business.
An Inflection Point for Markets?
Referenced several times in the FT this morning is the end of US exceptionalism when it comes to investing. Many US investors are no doubt with Trump and will stay firm, but international investors in US assets are clearly having second thoughts. The US Dollar is falling this year and US equity markets are some of the worst performing markets in the world in 2025.
Whether Trump’s policies will make America great again is yet unclear. But what is clear (whether he is dismantling US involvement in European defence, or tackling the US trade deficit) is his relentlessly aggressive political spin. Trump has attacked his domestic opponents, his immediate neighbour Canada, Denmark over Greenland, and now the rest of the world for ‘ripping off’ America. Attack is his way of trying to get what he wants; it comes over as arrogant bullying and it’s not a pretty sight for anyone other than a diehard MAGA supporter.
Trump’s obvious concern over the trade deficit is clearly driven by the US’s burgeoning debt. Perhaps not far under the surface the US economy is not as strong and stable as we were all lead to believe.
US Equities Priced for Perfection
The other certainty we see is that, by the inauguration in January, equity markets generally and US markets particularly were highly priced, in some cases ‘priced to perfection’. With US mega cap companies forecasting increasing profitability, economic growth and continued dominance against global competition, why shouldn’t their shares go up?
Anticipation of the impact of AI, of a President that would be supportive of equity markets and business, and belief in the US economy being on rails, which would be hard to stop, were dominating the consensus view.
Here is a reminder of the optimism and market exuberance in December last year.
Benign inflation, modest Trump impact, base rate cuts, strong dollar, and US equity markets +10% was the clear consensus view.
It is worth remembering that at the end of 2024, the S&P 500 had gained 40% in the previous two years, and we had seen a seven-fold gain in the index since the end of the last big bear market in 2009 when the index reached 750 against today’s 5,396.
That is equivalent to 14% p.a. average compound gain, even after this year’s sell off, over a period when officialdata.org suggests US inflation has averaged just 2.1% p.a. A return of 12% p.a. ahead of inflation versus an historic average return of c6% p.a. was never going to be sustainable.
Three months later, the dollar is weaker, inflation forecasts in the US are heading towards 4%. Recession risks are seen as much higher, and the S&P 500 is down 8% and still falling.
My personal view is that Trump is hell bent on option 3 above. Economists appear to be saying today that tariffs won’t get him there and that this approach has the propensity to cause the most damage.
For this reason, because this year’s 8% drop really only unwinds a small fraction of the excess returns US equities have delivered, and because US equities still look relatively expensive, we won’t be trying to ‘buy the dip’!
How Are We Doing?
Yesterday hurt our portfolios for sure, and there will be further pain today and into next week as fund prices catch up with the market moves.
This chart up to midday pricing yesterday shows our Balanced Bond Portfolio (A), Blended Equity Portfolio (C), Balanced Multi Asset Portfolio (B) versus the S&P 500 index tracker fund (D). All returns are converted to pounds, making it even worse for the US index.
Our bond managers are doing a great job and, unlike in 2022 when everything went down together, fixed income is largely unaffected. It is impossible to escape the down draft of the biggest equity market in the world (by a country mile!), but we have been getting some capital preservation in equities versus the US index. This may not look so strong after today.
We expected our Balanced Multi Asset Portfolio to be down around 2% year to date after yesterday, it looks like that might be nearer 3% after today. It might be a weekend to stay off the app!
As Stephen O’Sullivan writes in his update today, the seat belt lights are on. I would go a bit further now and say the drinks trolley won’t be in service until further notice and please don’t use the loo unless you really have to!
One final thought; the ads have changed again on the ‘drain’ and now it is some fancy trading platform whose strap line is: ‘investing doesn’t have to be complicated!’
I don’t think the simple solution of buying an index fund, or a magnificent 7 tech stock, will be so easily rewarding for the next decade. To me, things just got quite a bit more complicated.
I wrote this paper a couple of weeks back on ‘Are We All Taking Too Much Risk in Our Pension Funds?’. ‘We’ as Tideway clients hopefully aren’t, but lots will be getting a nasty shock when they look online at their accounts this weekend.
