Trump’s tariffs and the market impact

We understand that there may be heightened concern resulting from announcements made by President Trump last week relating to tariffs and potential global trade wars. There has been widespread reporting in the media, in addition to increased levels of market volatility (downturn) as a result of these announcements.

Keeping perspective

Markets tend to have short memories. The sharp sell-off following Trump’s tariff announcement may feel dramatic, however we have seen similar shocks before. In 2018, escalating US-China tensions triggered a 20% drop in US equities. 

Looking across past drawdowns, the scale and speed vary, however one pattern remains. Policy shocks often trigger sharp repricing that generally stabilise once the market digests the new regime. 

Uncertainty creates market volatility

We often talk to clients about “what causes market volatility” or market downturns, and in simple terms it is largely uncertainty. Markets love certainty and over the past 2 years we’ve had a relatively stable and certain forecast with global inflation declining towards preferred levels, along with interest rates. 

The recent announcements from the Trump administration have now destabilised this certainty and created a degree of uncertainty. The markets are currently uncertain of the outcome and as a result are reacting by pricing in what the markets view as the worst possible outcome. This typically continues until economies adapt to the new regime and the markets gain understanding and comfort of what the future looks like. It is at this time we typically see markets settle. How long this may take we don’t know, however we can use past events to help guide us.

Previous market sell-offs

The 2018 trade war sell-off saw a 20 percent fall over 65 days, while the COVID-19 drawdown was deeper but shorter. The current move at 12 percent over 44 days sits in line with past episodes such as the 2015 China slowdown or the early 2000’s recession. What matters now is whether escalation continues or if positioning clears enough for markets to find a floor.

​​​​​Source: Global X ETFs 

The tariffs in detail

A universal tariff of 10% was imposed, in addition to reciprocal tariffs charged on those exporting countries which have trade surpluses with the US. There is some belief that these tariffs may not be implemented and are really just the start of the negotiations with these countries. At the time of writing, it has been reported that over 50 countries have commenced talks with the US in relation to re-negotiating the tariffs imposed on the US in order to gain more favourable outcomes. Vietnam, who was seen to be one of the worst hit countries, has reportedly commenced discussions with the US to remove tariffs. Elon Musk, who is closely aligned with the Trump administration, has publicly announced that his view is that there should be zero tariffs between the US and Europe. We expect these negotiations to continue and further announcements and possible revisions over the coming days, weeks and months.

Where to from here? 

Markets normally price the worst case and reasonably quickly. This is what the market appears to be doing at present. The market will anticipate a reasonable economic slowdown and attempt to price that into the market over the next few weeks.

Incremental news flow should improve (from a political perspective) from there. Negotiations will allow some improvement (e.g. Trump is talking to China about tariff relief in exchange for the sale of Tik Tok). The more positive aspects of Trump’s agenda including deregulation and tax cuts for domestic production will play out over the course of this year. 

Political responses from other countries will be key to watch. This likely works against the US over the long run by forcing other countries to form alliances and strengthen competitiveness. The US consumer will see higher priced goods and businesses will face difficult decisions regarding whether to spend capital moving to the US (when policies are up for negotiation anyway).  

It is important to remember this is a human made event. The policies are subject to revision and central banks can start cutting rates. However, in the meantime the market will price in the worst case scenario. This is likely to be a difficult period for investors who have enjoyed a good run in markets since COVID-19. As always, investors need to think longer term when investing.  

We fully appreciate that uncertainty is unsettling for investors, however such periods offer active managers a unique opportunity to invest in high-quality businesses at compelling prices, often laying the foundations for strong future active returns.

Should you have any questions or would like to discuss how this current market event impacts you or your broader strategy or portfolio, please feel free to contact us and we will be happy to assist you.