Market Update:
The recent reported volatility in markets hides a number of more positive variables but there is no doubt that in the first 50 days of the Trump Presidency, he has up-ended a number of established norms.
From a market perceptive it is a mixed story. Although US equities have suffered year-to-date with US markets all showing negative returns, led by the Nasdaq and Russell 2000 both down over 9%, this is not the case in Europe and the UK who are both posting positive YTD returns.
This demonstrates the importance of diversification in the portfolio but also highlights that not all the news is negative for markets. In the last weeks, the focus has been on Defence spending leading to announcements by various countries of increased defence spending. For example, European equities rallied on the back of the German government's announcement of a significant increase in defence spending. This increase in spending is likely to be positive for the German economy as after decades of limited investment there is excess spare production capacity in manufacturing to be used to meet this demand and therefore boost the manufacturing sector of the economy.
Trump's use/threats of tariffs have added significant volatility to markets. One of the economic rationales for tariffs, according to the White House, is that it should see the dollar rise as the demand for imports fall leading to investment led capital flows into the US. A rising dollar would look to offset the costs of tariffs to the US consumer. What has been overlooked is that a major driver for currency returns focuses on interest rate differentials as well as capital flows. The dollar has fallen over 4% YTD as trade is a relatively small influence but there is now also a question on the strength of the US economy.
This follows Trump’s comments on Sunday that the US economy is in “transition”. This has been interpreted by investors that Trump is not ruling out a recession in the US on the back of his policies. The US Fixed Income market as well as US equity markets have reacted to this news, whilst the US dollar has continued to weaken on the back of potential interest rate cuts to support the economy.
The US market was overvalued leading into this bout of volatility. It was not excessively over-valued apart from arguably the Magnificent 7 and it is these stocks, particularly Tesla, that have led the sell-off. When you view the US market, as a whole, including equally weighted S&P 500 and the Dow Jones, the sell-off is not as severe. This would suggest that at the moment, this sell-off can be viewed as a reset, rather than something more substantial.
Looking forward, as highlighted already diversification remains key with other equity regions holding up well in the face of the recent uncertainty and investors diversifying out of the US into these markets. President Trump is due to meet various CEOs on Thursday where there is likely to be more pressure applied for the sweeping tax cuts that he promised during his election. Meanwhile, as it currently stands the US economy ‘soft landing’ still remains in place, although the risks around it have undoubtedly increased.
As ever, these articles are for information purposes to highlight factors affecting markets at present, and are not a call to action. Should changes need to be made the managers will already be amending portfolios and we will have factored short term volatility in to our planning assumptions. If you do have any queries please don't hesitate to contact your adviser.
About Aled Phillips : Aled is a Fellow of the PFS, a Chartered Financial Planner, and a Chartered Fellow of the CISI.
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The contents of this article do not constitute financial advice in any way; if you have any concerns about your finances you should talk to your financial adviser. The value of your investments can go down as well as up.
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