It has been another volatile week in equity and bond markets as investor sentiment remains fragile, with worries over trade wars and softening economic data weighing on sentiment
The long-held assumption, carried over from President Trump’s first term in office, that the President saw the stock market as a barometer of his success, appears not to be the case this time round. Yesterday saw the main US index, the S&P500, enter ‘correction’ territory, down over 10% from its recent high, set just 16 trading sessions ago.
President Trump’s weekend interview with Fox News set the tone for market risk appetite this week with his suggestion that he was prepared to endure weaker markets because “you can’t really watch the stock market”. Asked if the US was facing a recession, President Trump said “there is a period of transition, because what we’re doing is very big”. Trump’s bearish comments were taken as a sign that the so called “Trump put”, i.e. the assumption Trump would reverse policies if the market took fright, does not exist this time round and his tolerance for market selloffs is considerably higher than we saw in his first four years in office.
The recent market pullback has erased all of the gains since President Trump was elected but a review of historical data highlights the frequency of such occurrences. Since its inception in 1928, the S&P500 index has returned an average of 10% a year, despite an average intra-year drawdown of 16%. Corrections always feel painful, but this is the 30th correction of 5% or more since the lows back in March 2009 during the financial crisis, a period which has seen annualised returns of over 14%. The narrative will no doubt shift once again, but for now policy uncertainty remains extremely high, and economic data has softened. The real time GDP forecasts for the first quarter indicate at the headline level a contraction, on an annualised basis, of around 2.4%, a significant contrast to the 2-3% growth enjoyed during 2024. However the data is skewed by a significant spike in imports, which detracts from the GDP data, thanks to companies front running any potential tariffs by bringing goods into the US ahead of any country and product specific tariffs taking effect. We have also seen a spike in physical gold being repatriated into the US, also to avoid any potential future tariffs. So, while the US data, particularly the survey data, has softened, we think we are more in an ‘air pocket’ phase than anything more for now. However, everyone will be closely monitoring the economic data, cognisant that the US administration appears to be relaxed over some short-term pain to build for the long term.
Of course, elsewhere, while we have seen some volatility, we are seeing European and Emerging Markets making more positive progress. Finally, the US is no longer the only game in town, it seems. Both Europe and China are benefitting from self-help themes, while the wider emerging market space is benefitting from the recent weakness in the US dollar. Europe appears to be at a positive inflection point in terms of government spending, as their hand is forced by a perceived change in the transatlantic alliance. Meanwhile, China has once again set a growth target of 5% for this year, and is willing to increase government spending to achieve this goal. While the policy ‘bazooka’ appears to remain elusive, the narrative around China does appear to be turning a little more positive. Hence while US equities struggle, led lower by some of the mega cap tech names that have performed so well in recent years, we are seeing other markets showing relative strength. We should of course bear in mind that US tariffs are yet to be imposed on the EU, but that will likely change soon and this could well dent some of the new found optimism around European equities as the trade war potentially broadens and escalates.
In geopolitical news, there has been potential progress on moving towards a pause in the Russia-Ukraine conflict after the US and Ukraine held talks in Saudi Arabia earlier this week. As a result, Ukraine said it was ready to accept a US proposal for a 30-day ceasefire, with the US in turn lifting a pause on military aid and intelligence sharing. US Secretary of State Marco Rubio led the US team in the talks and said “before you can negotiate, you have to stop shooting at each other” and the “ball is now in Russia’s court”. US National Security Adviser Mike Waltz said the US and Ukraine also discussed “substantive details” on how the war could permanently end. The US held talks with Russia over the past 48 hours but while President Putin said he “supports the idea” behind a US backed ceasefire, Putin’s conditions for a pause suggest he is in no rush and is thinking more over a long-term settlement. Putin’s conditions including Ukraine accepting loss of the four partially occupied regions in the east of the country, withdrawing troops and committing to never joining NATO. These may be acceptable to the US, but Ukraine will be a lot less enthusiastic, not least in the absence of US security guarantees.
Financial markets are slowly coming to terms with the reality that President Trump’s policy agenda is, for now at least, less ‘market friendly’ than had been expected when he won the election last November. The prevailing view last autumn was that while we could see potential tariffs, policies around deregulation and tax cuts would be a positive force. However, the sequencing in the policy mix has so far seen plenty of negative policies around government cuts and tariffs, either implemented or threatened, causing significant uncertainty, while we have seen and heard very little on deregulation and tax cuts. More market-friendly policies are likely once Trump is comfortable with the tariff regime, and these will likely boost sentiment, confidence and capital expenditure as the Trump administration seeks to improve the backdrop ahead of the mid-term elections in 2026.
The focus now turns to the start of April and some more clarity on the size and scope of the “reciprocal” tariffs that Trump has promised will be imposed on the US’s trading partners. There remains considerable uncertainty and likely further escalation is ahead in the nascent global trade war, and in the absence of any positive policy measures to counter some of the uncertainty, investor sentiment will remain fragile. However, our view remains constructive – we do not yet see a US recession on the horizon, and at a time of upheaval some market volatility is no surprise. But a broadening of market returns should be welcomed, with the focus moving beyond the ‘Magnificent 7’ to other US equities, and indeed, other equity markets as well.
Of course, the really big question (for me anyway) is if Wales can possibly escape a second consecutive wooden spoon in the Rugby Six Nations. A win against England tomorrow feels unlikely, so it will be all about bonus points, either through a narrow defeat or somehow scoring four tries. A stressful Saturday afternoon awaits…
Source: Columbia Threadneedle Investments as at 14 March 2025.
