Navigating recent market volatility

Trump’s second tariff war has unsettled markets.

How have Trump’s tariffs impacted markets

For UK advisers only:
​
Subscribe to our weekly newsletter to get all our insights to your inbox (for UK financial advisers only

​Markets have been volatile since Trump’s Tariff Tuesday. Global equities – driven by US equities have corrected, and there has been a dash to defensive assets within equities, such as UK Equity Income, and across asset classes to shock absorbers such as Gold which hit a record high.

Why did US equities sell off so hard

US equities sold off so hard because valuations were stretched.
​
Valuations had run up higher for US equities in 2024 and were persistently lower for UK/Europe: so something had to give.  This has triggered a change in the direction of asset flows as institutional investors rebalanced away from the US and towards Europe (and also the UK) as the Tariff wars restarted.

How were we positioned

We were already conscious of US equity valuations being stretched.  This is why we had recommended our clients to balance traditional index exposure (which was highly concentrated) with S&P 500 Equal Weight exposure (to target “deconcentration”) in early November 2024.

Within our global equity allocation framework (which is dominated by US), we tilted holdings towards the Value-factor and Minimum Volatility factor in January as part of our factor overlay recommendations.  We also targeted more defensive sectors such as Consumer Staples, Financials and Utilities.
​
The valuation levels in these factors and sectors were lower and this has helped mitigate the declines in the main US index within an adaptive equity allocation.

US earnings and economic growth intact, but more uncertain

​Trump’s tariff policies are unleashing uncertainty on the markets.  The market shake out since “Trump Tariff Tuesday” was not a Lehman’s moment (financial meltdown), nor a Covid moment (world on pause).  It was a step change in the potential risk to growth and inflation which triggered a valuation derating.  US earnings and economic growth outlook remains intact, but anxiety from Trump’s stop-start tariff policy has been destabilising that outlook.

Central Banks on hold

The increased uncertainty has led to a widening of the range of growth and inflation expectations from Fed members.  This has led to the Fed’s expectations on growth being downgraded and expectations on inflation being upgraded, whilst leaving rates on hold.

Like the US Fed, the UK’s Bank of England also kept rates on hold as they balance between an uncertain outlook for growth and persistent “zombie” inflation, which though down, is not dead.
​
The major Central Banks remain caught between an inflation rock and a growth hard place.

Recall Trump’s Tariff announcements… from 2018

In 2018, President Trump initiated protectionist trade initiatives by imposing tariffs mainly on China, but also on Canada, EU and Mexico. In March 2018 he imposed tariffs on Steel (25%) and Aluminium (10%) which covered an estimated of 4.1% of US imports, but by May 2019, they were lifted and the US successfully concluded a trade deal (which later came in to force as the USMCA).  This which ultimately resulted in lifting of those tariffs.
​
The US equity market was similarly impacted as the First Trump Tariff War kicked off in March 2018, then soon recovered those losses and reached new highs by August 2018.

The next tariff deadline

Following on from Tariff Tuesday, Trump is unleashing reciprocal tariffs on all other countries on 2nd April 2025 which could unleash the next wave of volatility.

Keep calm and stay invested

​Market fluctuations are a normal part of investing, and while recent downturns can be unsettling, history demonstrates that periods of decline are often followed by robust recoveries.  US markets are currently reflecting high political uncertainty, but the underlying corporate earnings growth continues to remain resilient. Trying to time the market by fear-selling during lows can lead to missing out on significant gains as/when the market rebounds.  Much as though the rhetoric can be distasteful, investors have to try and remain rational, not emotional.  By staying invested, adhering to a long-term strategy, and focusing on the resilience of a portfolio are key to navigating these periods and maximizing potential returns over the long-term. Remember, patience and discipline are vital for long-term investment success.