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Everyone has a plan until they get punched in the face, Mike Tyson once famously said. On Wednesday last week Donald Trump punched the global economy in the face with a set of tariffs that exceeded most investors’ worst case scenarios. Unfortunately, being punched in the face is an occasional occupational hazard for investment markets. To give some comfort, I show some data at the bottom here on 1 and 3 year returns following previous market shocks. The correct longer-term advice is probably – as it nearly always is – not to panic and stick to your investing plan. Our job here though is to also think about and try to profit from shorter term risks and opportunities, so here are my thoughts on where we are today:
- So far this is trading like a growth shock: equities are down and bonds are up. For reasons I discuss below, there is chance bond markets wake up to some of the inflation risks here. We have therefore taken some of our gains in bonds and are raising some cash. Higher cash balances will help us to be able to move quickly if we see any opportunities in the next weeks and months.
- Is this peak tariff uncertainty and so a chance to be a bit brave? There was definitely a view ahead of liberation day that once we knew what the worst case looked like for tariffs there would be room for a rally as some of the uncertainty would be out of the way. Now I am not so sure. We are entering the retaliation and deal-making phase of the tariffs and it is hard to know how Trump and his trading partners will react. Investing on the basis you know what Trump will do doesn’t feel like a money-making strategy. I’d expect headline risk and uncertainty to remain high for a while.
- Tariffs are bad because they mean higher prices and higher uncertainty for businesses and consumers. The real risk is that this trips the global economy into a recession. Markets are certainly trading like growth is the problem here. As I write (morning of Tuesday 8th) global equities are down -8.7% (in GBP) month to date and UK equities are down -9.1%. And, as you would expect in a growth shock, bond markets are up.
- This is in spite of the fact that the tariffs announced so far would add about 2% to US CPI Inflation (according to Capital Economics’ calculations). It is interesting to me that US bonds are looking through this and focussing more on the growth risks here. US 10 year yields are down over 60bps from their January highs and UK bonds are also rallying. The UK 10 year gilt is now up 1.3% from its lows 9 days ago. So far, for balanced investors at least, bonds are providing some protection.
- US equities have underperformed the rest of the world so far year to date. But remember tariffs mean more tax revenue for the US government. It feels likely at some point this will be recycled into tax cuts for US consumers and businesses. Europe, for example, just does not have this potential tailwind. And it still has to deal with all the headaches tariffs bring. Europe and Japan are also normally very sensitive to growth slowdowns. If a slowdown does indeed arrive I have a hard time believing these markets will continue to outperform.
- Similarly, a large part of US under-performance has come from their technology giants re-rating lower in part because China and its Deepseek model is making investors question their current high AI investment levels. However, looking forward technology earnings (which continue to hold up) tend to be more structural and less growth sensitive. It may be that these companies will be (as they have been in the past) proven to be safe havens in relative terms at least.
- The Fed is currently expected by the market to make 4 rate cuts this year. Will they do this if inflation (already above their target) starts to rise again? For now cash, which still earns a healthy yield, looks an attractive place for US investors to sit and wait. That said, UK and Europe do not have to deal with the inflation shock side of tariffs (bar whatever retaliation we might see) but are fully exposed to the downside growth risks. For these markets bonds (where we already have an overweight) continue to look attractive.
My one other crumb of comfort is that events like these are, unfortunately, part and parcel of the investing business. And here, via JP Morgan, are 1 and 3 year returns following previous market shocks. There are of course no guarantees in life, but there is no reason to panic here either. We will continue to look for opportunities and I will report back what we find.
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.
