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The US S&P 500 and UK FTSE 100 indices both ended April down -0.7% for the month. If you’d taken a long Caribbean holiday in April you might well have come back wondering what all the fuss was about. Of course, you would have been away for Wednesday 9th April when the S&P index went from being down -0.7% to up +9.9% in the space of 5 hours, one of the wildest days in stock market history. I wrote in my review of the first quarter that predicting what the Trump team might or might not do next wasn’t a great strategy as it was not clear to us that even they knew what the plan was. I also wrote in my 8th April weekly note that “the correct longer-term advice is probably – as it nearly always is – not to panic and stick to your investing plan”.
It turns out – so far at least – that advice has been more or less correct. Congratulations if you were brave enough to buy equities on the days after Liberation Day. Commiserations if you sold. The casino has re-opened for May and as I type US equities are now up for the quarter (in US dollars at least). Of course, this makes it seem like we knew that Trump would back off from his hardline tariff approach and the market would regain all its losses in a few weeks. We did not. The point was more that some outcomes are essentially unknowable and so uninvestable. This one happens (so far) to have worked out better for investors than many thought possible a few weeks ago but I think the general approach would have been the right one even if things had got worse (as they may yet do) not better. One other source of comfort we took in April was that – for balanced investors at least – bond markets held up pretty well for the period. UK government bonds are up 1.8% for the quarter as I type. Unlike much of 2022, bonds are providing some protection from the tariff storm.
But that is the past, what about the future? There is a saying that if you are going to panic, panic early. Is now the right time to panic a bit? Much of the latest survey data looks pretty gloomy and the historically pretty reliable Atlanta Fed GDPNow forecast was showing negative US GDP growth for Q1.
But this comes with a health warning: both the hard and soft data are going to be extremely messy from here. There was plenty of front-loading of goods purchases ahead of the tariffs. And we are about to hit a sudden stop in US imports, particularly for goods from China. I am not sure why anyone would pay a 145% tariff (payable in full when the goods arrive on shore in the US) while a potential deal is being negotiated. Some industries will benefit from this, and some will really suffer. With this background, I was comforted to see that some of the higher frequency data we look at is, so far, holding up OK. As an example, here are Air Freight volumes for April which is showing a small (tariff front-loading?) acceleration:
I wrote last week about the preference many investors now have for international markets such as Europe over the US. One reason we have not been more aggressive about switching away from the US market is that this effectively means switching away from world’s leading technology companies. And this week some strong technology earnings came out that helped illustrate the risk of being short this sector. Google (now called Alphabet) came out with earnings per share of $2.81 compared to market estimates of $2.01. Microsoft grew its revenues 15% year on year and its share price is up almost 20% from its April lows. It is worth remembering that not everything that happens in markets is about tariffs.
Chris Brown, CIO
cbrown@ipscap.com
The value of investments may fall as well as rise and you may not get back all capital invested. Past Performance is not a guide to future performance and should not be relied upon. Nothing in this market commentary should be read as or constitutes investment advice.
