Market Reset in Motion: Making Sense of the Sudden Slide
Following on from our note on Friday, markets have continued to adjust rapidly and price for both uncertainty and expected economic weakness. This has been most evident in the US however other global markets including our own have not been immune from the effects.
A quick summary of events so far:
- The market has reacted extensively to President Trump’s announcement on ‘Liberation Day’ unveiling an extensive and broad-based hike in US tariffs.
- The extent of the tariffs announced has surprised’ to the upside relative to expectations however this is before any bilateral negotiations and retaliation.
- While the final tariff levels will remain unknown for some time, policy uncertainty has reached peak levels not seen since the GFC raising concerns around global and US economic growth
- This is now being factored into market positioning across equity, bond, and currency markets
- With inflation not yet back in target ranges. many see global central banks as constrained in being able to respond to the volatility and emerging growth challenge which is creating further nervousness.
As we have seen previously, in extreme market sell offs of this nature (Global Pandemic 2020, GFC 2007-2008, Tech boom 2001), the speed and rate of adjustment is voracious and technical in nature with liquidity at a premium in addition to leverage being a key factor driving outcomes. The current market conditions appear no different with high levels of uncertainty around what actions governments and central banks may take to offset the tariffs and provide stimulus in the US and overseas, the extent of the slowdown that will occur in global and US GDP, and the impact that will flow through to company earnings. Ultimately this will all determine the level at which equities trade and the direction for interest rate policy. Markets would appear to be playing catch up to the downside risk under a range of scenarios that could emerge.
Our immediate thoughts are that Australia could well be a relative beneficiary of the trade wars with the direct tariff impact on Australia among the lowest of any country. Additionally, with inflation trending lower, the Reserve Bank has scope to respond flexibly with a rapid program of rate cuts should they be required. While our key trading partner China has been targeted with significant tariffs, it is expected that Chinese policy makers will respond with growth supportive measures to ameliorate some of the expected tariff impact. Australian commodity exports are well placed to benefit from any good news here.
As we noted on Friday, these unilaterally imposed US policy changes can be wound back. Trump is a pragmatist at heart and will be keenly aware that he has just lost US households a significant amount of their personal wealth. He will also probably have an eye on the mid-term elections next year. For these reasons, we expect the US to enter a greater range of bilateral tariff arrangements with individual countries which are likely to be struck at lower tariff levels than have been initially proposed by Trump.
As indicated, there is still a lot to play out with Trump’s economic reset, and volatility is likely to remain high for the time being. The good news is that with lower prices, an active approach to investing allows the flexibility to seek the long-term opportunities that are starting to appear.
To read the March Update click here. For more information, also listen to the podcast below:
Subscribe and Stay Informed: Spotify – YouTube – Apple Podcasts – Vimeo
Read the March Update
Disclaimer: SG Hiscock & Company has prepared this article for general information purposes only. It does not contain investment recommendations nor provide investment advice. Neither SG Hiscock & Company nor its related entities, directors or officers guarantees the performance of, or the repayment of capital or income invested in the Funds. Past performance is not necessarily indicative of future performance. Professional investment advice can help you determine your tolerance to risk as well as your need to attain a particular return on your investment. We strongly encourage you to obtain detailed professional advice and to read the relevant Product Disclosure Statement and Target Market Determination, if appropriate, in full before making an investment decision.
SG Hiscock & Company publishes information on this platform that to the best of its knowledge is current at the time and is not liable for any direct or indirect losses attributable to omissions for the website, information being out of date, inaccurate, incomplete or deficient in any other way. Investors and their advisers should make their own enquiries before making investment decisions.
