We started 2025 with economists predicting a reasonable level of economic growth with inflation continuing on its downward path. This underpinned the view that interest rates would reduce further providing a favourable outlook for both equities and bonds.
Stagflation
This benign outlook has been turned upside down over the last couple of months culminating in 2 April 2025, coined ‘Liberation Day’ by US President Donald Trump, when he announced his tariff plan. This plan is ‘stagflationary’ since tariffs result in higher prices which is inflation and also depress economic growth since higher prices result in less consumption.
It goes without saying that stagflation is invariably bad for equities since an environment where economic growth is muted and prices are rising is tough for companies to thrive and deliver profits. Stagflation is also generally negative for bonds since interest rates tend to stay higher than forecast.
Tariffs stun markets
The level, extent and timing of Trump’s tariffs is worse than anticipated. The average US tariff on imports will increase to approximately 25%, which is the highest level for a century, much more than the 10-15% expected by markets and the current rate of approximately 3%. The tariffs will start this week leaving no time for negotiations between governments.
It is estimated that the proposed US tariffs will increase US inflation by up to 1.5% with a similar reduction in US GDP growth. According to many leading business figures, such as JP Morgan’s Jamie Dimon, whilst the tariffs may not cause a recession in the US, they increase the probability of a recession. Dimon also highlights the many uncertainties from the planned tariffs, including potential retaliation from other countries, the impact on business confidence, investments and capital flows, as well as the potential for undermining the US’ long-term alliances. Indeed, China has already retaliated with 34% tariffs whilst the EU is considering its response with the expectation of countermeasures. Countries which rely heavily on exports, such as Germany, Japan and China are particularly vulnerable to this escalation and the risk of a more serious global trade war.
What next
It is impossible to predict how this situation will resolve itself. For optimists it is possible that countries will be able to negotiate with the US and agree for moves back towards free trade; however, this appears to be challenging since the tariffs have been fixed rather illogically based on overall trade deficits rather than individual products and services.
For pessimists a trade war could develop with a ratcheting up of tariffs following retaliatory action by other countries. Attempting to model either scenario in terms of future inflation or economic growth is speculative since there is no historical comparator for such a step change in tariffs in recent history.
The position could be ameliorated by other actions, such as possible fiscal or monetary stimulus by governments, de-regulation in the US or companies accelerating investment in the US to circumvent tariffs. Most importantly, if other countries offer concessions to Trump which he accepts, sentiment could turn around quickly.
Our view
Whilst the current market turmoil is painful, a lot of risk is now ‘priced in’ and we do not view recent events as a precedent to a long-term market crisis. Inflation has proven stickier than forecast but central banks have got some capacity to reduce interest rates further.
In addition, government spending should give economies a significant boost in the coming years with recent announcements in countries such as China and Germany, which has loosened its borrowing rules to spend €500 billion on defence and infrastructure. Other governments, particularly in Europe, are also anticipated significantly to increase defence spending as part of upgrading industrial strategies which are less reliant on the US in future. Furthermore, the US government may focus later this year on tax cuts and de-regulation which could re-energise equity markets and help restore market confidence.
Remain invested to benefit from a market recovery
History has shown that trying to time markets by switching out of equities into cash and then attempting to buy back in at the bottom of the market is fraught with risk and very difficult to do, especially where irascible politicians such as Mr Trump are setting the agenda. The risk here is crystallising losses by selling equities low and then buying back into equities once they have bounced at a higher level. Alternative strategies of seeking safety in assets such as gold are also fraught with risk as it involves selling equities low and buying gold at a high price which would be vulnerable to a correction when equities recover.
Accordingly, we would need to see a further significant deterioration in the political and economic outlook to consider a switch to cash or other perceived safe haven assets as sensible. In such an environment we would be more likely to favour buying into quality parts of the market which had been in our view unfairly oversold.
It is also important to note that our remit is to manage portfolios with market benchmarks as comparators – this means our aim is to match and outperform equity and bond markets over the medium-term mitigating volatility as much as possible; our aim is not to outperform cash when investment markets decline or to eliminate volatility.
Plan for portfolios
We reviewed all portfolios in detail last week at the end of March with a view to some moderate rebalancing trades this week. However, in light of the current market volatility we have decided to postpone portfolio changes at this time until market stability returns and trades can be placed with confidence that fair value is being achieved. Today for instance, there have been intra-day price movements of around 10% on many multi-national companies undermining any possibility of sensible portfolio management.
In addition, rebalancing portfolios results in being out of the market for a few days whilst trades are settled which is an unacceptable risk in volatile markets. Finally, markets are likely to be driven by political developments in the short term, so until the direction of travel becomes clearer in respect of tariffs, holding off making any changes to portfolios ensures decisions are based on the new paradigm reflecting the new market dynamics.
Looking ahead
Having managed portfolios for over 25 years and seen several market cycles including a number of booms and crises, it is important to retain a balanced outlook in the face of alarming headlines. This is not to ignore the seriousness of the current global situation but to maintain a disciplined approach to investments focused on doing the right thing over time which ultimately creates value.
Markets and businesses should gain more certainty as the year progresses helping to restore stability once Mr Trump clarifies and implements policies. Indeed, President Trump is often viewed as a dealmaker, so he may potentially be open to negotiations as a way forward to resolve the trade imbalances. In addition, the expectation of tax cuts and de-regulation in the US should provide support later in 2025. Finally, Republicans are likely to have half an eye on the mid-term elections in 2026, so will be keen for markets to stabilise and recover considering the high level of share ownership in the US.
We will keep clients updated on market developments as the year progresses with our continuing focus on ensuring portfolios are positioned to benefit from the market recovery and the opportunities which will arise.
Please note that the content on this page is based on our understanding and the available information; we cannot be held responsible for any errors, and you should not act on the basis of the information in these articles, nor do they constitute investment advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise. Overseas investments are affected by currency movements and exchange rates. If you would like investment advice on your individual circumstances, please do not hesitate to get in touch via telephone at 01392 875500 or email at info@SeabrookClark.co.uk.
The Trump Slump
Matthew Clark
We started 2025 with economists predicting a reasonable level of economic growth with inflation continuing on its downward path. This underpinned the view that interest rates would reduce further providing a favourable outlook for both equities and bonds.
Stagflation
This benign outlook has been turned upside down over the last couple of months culminating in 2 April 2025, coined ‘Liberation Day’ by US President Donald Trump, when he announced his tariff plan. This plan is ‘stagflationary’ since tariffs result in higher prices which is inflation and also depress economic growth since higher prices result in less consumption.
It goes without saying that stagflation is invariably bad for equities since an environment where economic growth is muted and prices are rising is tough for companies to thrive and deliver profits. Stagflation is also generally negative for bonds since interest rates tend to stay higher than forecast.
Tariffs stun markets
The level, extent and timing of Trump’s tariffs is worse than anticipated. The average US tariff on imports will increase to approximately 25%, which is the highest level for a century, much more than the 10-15% expected by markets and the current rate of approximately 3%. The tariffs will start this week leaving no time for negotiations between governments.
It is estimated that the proposed US tariffs will increase US inflation by up to 1.5% with a similar reduction in US GDP growth. According to many leading business figures, such as JP Morgan’s Jamie Dimon, whilst the tariffs may not cause a recession in the US, they increase the probability of a recession. Dimon also highlights the many uncertainties from the planned tariffs, including potential retaliation from other countries, the impact on business confidence, investments and capital flows, as well as the potential for undermining the US’ long-term alliances. Indeed, China has already retaliated with 34% tariffs whilst the EU is considering its response with the expectation of countermeasures. Countries which rely heavily on exports, such as Germany, Japan and China are particularly vulnerable to this escalation and the risk of a more serious global trade war.
What next
It is impossible to predict how this situation will resolve itself. For optimists it is possible that countries will be able to negotiate with the US and agree for moves back towards free trade; however, this appears to be challenging since the tariffs have been fixed rather illogically based on overall trade deficits rather than individual products and services.
For pessimists a trade war could develop with a ratcheting up of tariffs following retaliatory action by other countries. Attempting to model either scenario in terms of future inflation or economic growth is speculative since there is no historical comparator for such a step change in tariffs in recent history.
The position could be ameliorated by other actions, such as possible fiscal or monetary stimulus by governments, de-regulation in the US or companies accelerating investment in the US to circumvent tariffs. Most importantly, if other countries offer concessions to Trump which he accepts, sentiment could turn around quickly.
Our view
Whilst the current market turmoil is painful, a lot of risk is now ‘priced in’ and we do not view recent events as a precedent to a long-term market crisis. Inflation has proven stickier than forecast but central banks have got some capacity to reduce interest rates further.
In addition, government spending should give economies a significant boost in the coming years with recent announcements in countries such as China and Germany, which has loosened its borrowing rules to spend €500 billion on defence and infrastructure. Other governments, particularly in Europe, are also anticipated significantly to increase defence spending as part of upgrading industrial strategies which are less reliant on the US in future. Furthermore, the US government may focus later this year on tax cuts and de-regulation which could re-energise equity markets and help restore market confidence.
Remain invested to benefit from a market recovery
History has shown that trying to time markets by switching out of equities into cash and then attempting to buy back in at the bottom of the market is fraught with risk and very difficult to do, especially where irascible politicians such as Mr Trump are setting the agenda. The risk here is crystallising losses by selling equities low and then buying back into equities once they have bounced at a higher level. Alternative strategies of seeking safety in assets such as gold are also fraught with risk as it involves selling equities low and buying gold at a high price which would be vulnerable to a correction when equities recover.
Accordingly, we would need to see a further significant deterioration in the political and economic outlook to consider a switch to cash or other perceived safe haven assets as sensible. In such an environment we would be more likely to favour buying into quality parts of the market which had been in our view unfairly oversold.
It is also important to note that our remit is to manage portfolios with market benchmarks as comparators – this means our aim is to match and outperform equity and bond markets over the medium-term mitigating volatility as much as possible; our aim is not to outperform cash when investment markets decline or to eliminate volatility.
Plan for portfolios
We reviewed all portfolios in detail last week at the end of March with a view to some moderate rebalancing trades this week. However, in light of the current market volatility we have decided to postpone portfolio changes at this time until market stability returns and trades can be placed with confidence that fair value is being achieved. Today for instance, there have been intra-day price movements of around 10% on many multi-national companies undermining any possibility of sensible portfolio management.
In addition, rebalancing portfolios results in being out of the market for a few days whilst trades are settled which is an unacceptable risk in volatile markets. Finally, markets are likely to be driven by political developments in the short term, so until the direction of travel becomes clearer in respect of tariffs, holding off making any changes to portfolios ensures decisions are based on the new paradigm reflecting the new market dynamics.
Looking ahead
Having managed portfolios for over 25 years and seen several market cycles including a number of booms and crises, it is important to retain a balanced outlook in the face of alarming headlines. This is not to ignore the seriousness of the current global situation but to maintain a disciplined approach to investments focused on doing the right thing over time which ultimately creates value.
Markets and businesses should gain more certainty as the year progresses helping to restore stability once Mr Trump clarifies and implements policies. Indeed, President Trump is often viewed as a dealmaker, so he may potentially be open to negotiations as a way forward to resolve the trade imbalances. In addition, the expectation of tax cuts and de-regulation in the US should provide support later in 2025. Finally, Republicans are likely to have half an eye on the mid-term elections in 2026, so will be keen for markets to stabilise and recover considering the high level of share ownership in the US.
We will keep clients updated on market developments as the year progresses with our continuing focus on ensuring portfolios are positioned to benefit from the market recovery and the opportunities which will arise.
Please note that the content on this page is based on our understanding and the available information; we cannot be held responsible for any errors, and you should not act on the basis of the information in these articles, nor do they constitute investment advice. Past performance is not necessarily an indication of future returns; the value of investments and any income from them is not guaranteed and can fall as well as rise. Overseas investments are affected by currency movements and exchange rates. If you would like investment advice on your individual circumstances, please do not hesitate to get in touch via telephone at 01392 875500 or email at info@SeabrookClark.co.uk.
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