“Toto, I’ve a feeling we’re not in Kansas anymore.”
Just like Dorothy said to her dog when they were whisked away by a tornado from Kansas to Oz, we find ourselves in an uncomfortable world. The unpredictability of Donald Trump since his inauguration has dominated the news headlines and the direction of financial markets.
Specifically, the valuation period (the three-months from 5 January 2025 to 5 April 2025) is bookended by two key factors. On one side, there was speculation that his tax-cut and deregulatory plans would be positive for financial markets as they would stimulate an already expanding US and global economy. On the other side, is his recent chaotic rollout of trade tariff announcements which could slow the global economy.
This resulted in a significant shift in sentiment in financial markets. For example, the S&P 500 index flipped from being up nearly 3.5% early in the valuation period, to ending the period down just shy of 15%. Elsewhere, the technology focused Nasdaq index ended the period over 20% lower, while the Japanese Nikkei index fell over 14% over the same period.
Donald Trump is clearly a definitive Marmite figure. However, from our perspective, “meaner than a junkyard dog,” popularised by the song ‘Bad, Bad Leroy Brown’ by Jim Croce in 1973, springs to mind right now as it is never easy (and certainly not pleasurable) to write this commentary after financial markets have fallen as aggressively as they have over the past week.
However, whatever you or we think of him as a person, it is important to be dispassionate when it comes to investing for long-term growth. Evidence has shown us time and again that whilst equity markets hate periods of uncertainty (and Donald Trump’s trade tariffs are a big uncertainty), they can deal with any eventuality.
This is especially true when one considers how his initial 25% tariff announcement at the start of February on Canada and Mexico (who are the US’s largest trading partners) played out: after financial markets initially fluctuated, they quickly recovered after the worst-case scenario was avoided. First there was a one-month delay with the tariffs and then it was announced that all goods that were compliant with their free trade agreement signed in 2020 (known as USMCA), would be excluded from the tariff – and these account for the bulk of Canada’s and Mexico’s exports to the US.
Consequently, whilst Donald Trump’s big tariff reveal earlier this week on Wednesday 2 April 2025 (so called ‘Liberation Day’) came with its intended shock and awe, we believe that it simply opens the door for the kind of negotiations, U-turns and exemptions, that we saw with Canada and Mexico in February & March.
As such, Donald Trump’s current aggressive tariffs may quickly look a lot less menacing than they do today – which in turn suggests to us that the current doom and gloom in both the media and financial markets has got ahead of itself (hence why we believe that it is important to look past the negative news headlines and instead maintain a long-term perspective).
Additionally, it’s ironic that for all of Donald Trump’s complaints, the biggest beneficiary of globalisation has been the US. Not only has US economic growth outpaced most of the developed world over the last few decades, but US companies have taken advantage of outsourcing and offshoring to maximise their profits – and so these tariffs, which are effectively an inflationary tax on US imports, will hurt US consumers and US companies the hardest.
In fact, many of the biggest exporters to the US are US companies themselves. For example, consumer goods such as Apple’s iPhone, Nike’s trainers and Gap’s clothes are produced in countries that have been targeted with high tariffs (such as Vietnam and China) and will therefore start to cost US consumers considerably more, which in turn could slow US economic growth – and this will not be popular in America as it was concern over inflation and economic growth that helped Donald Trump get back into the White House.
Therefore, if Donald Trump’s tariffs don’t work as a bullying tactic or aren’t quickly watered-down as we believe they will be in the weeks to come, the US will simply be left with higher prices and an unpopular President – and something we learnt from his first term, is that Donald Trump wants to be popular and wants people to know he is popular.
Additionally, at my wealth, not only do we take a long-term approach to investing, but we also purposely diversify client portfolios across a number of geographies and asset classes. Although client portfolios have unfortunately fallen in value during this period, our diversification strategy has helped to limit the losses.
This is because there will be some winners. For example, as it currently stands, the impact on the UK from Donald Trump’s tariffs aren’t likely to drive up inflationary risks, unless the UK government retaliates with additional tariffs on US goods.
In fact, what is more likely is UK inflation will fall as the US dollar weakens (which makes US imports cheaper), which in turn may help persuade the Bank of England policymakers to lower UK interest rates – which is positive for UK financial markets.
Additionally, China has an immense manufacturing capacity and US tariffs will mean that Chinese products will have to look elsewhere for a home. This trade diversion is likely to result in lower prices for those buyers – and therefore lower inflation (and potentially lower interest rates) in those countries.
In summary, we believe that the sell-off in global equity markets over the past week is a classic knee-jerk reaction to a new uncertainty, where market traders ‘sell first and ask questions later’.
However, we believe the headline-driven panic of the past week has cleared the decks and laid the ground for a recovery – and previously when sentiment was this negative, financial markets didn’t need unequivocal good news to have an outsized positive response, simply less negativity was enough. This is particularly true now given the possibility of tariff U-turns. Therefore, the best way to maximise future returns is not by trying to time the market, but by maximising the time you are invested in it.
Finally, whilst the above views are correct at the time of writing (7 April 2025), financial markets are currently beholden to tariff news – and as we said earlier in relation to February’s tariffs on Canada and Mexico, there is a good chance Donald Trump’s initial aggressive threats are likely to get watered down during the time it takes to produce this valuation statement.
