Whether Donald Trump expected to liberate investors in US equities from seven trillion dollars and counting of their wealth is unclear.
Trump was re-elected as president with manifesto promises including an America-first foreign policy and a renegotiation of trade deals. Endorsed by voters, last week he launched a swathe of nose-bleeding tariffs on all global trading partners.
Target countries’ hackles are rising. The European Union condemned the move and is preparing for countermeasures. China announced a retaliation 34% tariff on all US imports. The less-affected UK was more measured in its response, positioning itself as a bridge between the EU and the US.
Economists have scratched two percent off forecast economic growth in the US and added a similar amount to inflation forecasts. Many significantly raised their unemployment expectations too.
For now, backward-looking employment numbers are strong, and along with elevated and likely rising inflation leave only a muddy rationale for US interest rate cuts.
On the ground, corporates are parking growth plans and consumers delaying big ticket spending plans.
Trump’s first-term actions and his book The Art of the Deal both highlight his usual playbook of beginning negotiations unpredictably and aggressively. We can only hope his plan is to reverse current proposals rather than catalyse a damaging recession and alienate the rest of the world and his voters. After opening hostilities, trading partners may settle down and agree deals that provide Trump an off-ramp to his current stance.
US equities were sagging before the tariff announcement. Front-running a potentially bad tariff outcome and fading optimism around the prospects of artificial intelligence were contributing factors. Including futures moves US equities are now down 20% from their peak, and much uncertainty is already priced in. Trading volumes and prices on Thursday and Friday this week suggest capitulation is well underway. Until we see signs of productive discussions, however, there may be no rush to buy just yet.
UK and European equities have fared better this year, returning -6% and -1% respectively, boosted by the German infrastructure and defence spending packages. Being significantly less exposed to technology stocks has also helped. Chinese markets are down over 10% this year.
Aided by positive bond and gold returns to offset broadly weak equities, Canada Life’s mixed asset funds are down single digits in 2025 to 4th April. Our base case is for markets to be near a trough. Events are moving very quickly however, and we see few immediate saviours on the horizon. Specifically European and Chinese politicians are making no mollifying noises, and central banks are unlikely to respond quickly in the absence of cracks in financial instability.
The multi-asset team at Canada Life has not been buying equities during the falls. Whilst we believe equity markets have capitulated, without a catalyst for a rally we stay cautious. Timing the reduction of equity underweights caused by market action is our next decision. We are paying close attention to signals such as credit risk and liquidity indicators.
From an equity team perspective, the most important response is to stay calm. In coming weeks, we will likely see wild swings in economic data in response to recent announcements which could see further downside risk in equity markets. For us, corrections consist of both size and time. We have seen plenty of the former but little of the latter. We are most likely to add risk to portfolios in coming weeks but in a considered fashion as opportunities present.
Important information
The value of investments may fall as well as rise and investors may not get back the amount invested.
The views expressed in this document are those of the fund manager at the time of publication and should not be taken as advice, a forecast or a recommendation to buy or sell securities. These views are subject to change at any time without notice.