In just a matter of weeks share markets have corrected and there is talk about a US recession. Most of this is just noise as the world adjusts to Trump doing what he said he would do. The most surprising part of all of this is how surprised everyone seems to be. But regardless of how we got here, we’ve had a long overdue pull back. At the time of writing the S&P500 is down 10% and the NASDAQ down 13%. So, what does it all mean, and what should investors expect next?
I think it's worthwhile considering Trump’s mindset. I once asked the former managing director of an ASX listed company his biggest lesson he learned from his boardroom battles. His answer and his candour surprised me. He said, “when you have power, use it and act quickly”. Those words stood out because they weren’t the usual corporate speak; they were a real insight into how you enact change. I am reminded of those words as I see Trump embark on his second term. I think that's exactly the lesson Trump learned from round one, hence the pace of change of his new administration. He has the power, and he is going to use it, and he is going to move as quickly as possible. This is a very different kind of chaos to his first term. This time it seems that he is moving with real purpose.
From a short-term perspective, the tariff idea as a negotiation tool is great it's an effective stick to motivate other nations to act on objectives in other areas. In the case of Mexico and Canada those tariffs don't seem to be intended as a long-term imposition. Using tariffs in that way has been done numerous times by the Chinese on Australian Industries, so it's not a new idea and it can be effective. As a means to rebalance or level the playing field in a specific area there is also merit as it can assist ailing industries at home who are struggling with cheap goods from other nations. No doubt there will be some retaliation, but overall markets adjust quickly and after a period it’s business as usual albeit under the regime of the new normal. This is where investors were about a month ago.
If in the long term the tariff end game devolves into a tit for tat ever higher tariffs and genuine trade war, then that probably isn’t good for anyone. It’s just destructive. In that situation, tariffs are bad for growth and bad for inflation. Stagflation and recessions are suddenly possible. Markets are now reacting to the uncertainty that all these factors represent. While the economic data is generally okay, the uncertainty that exists does have a real impact. Consumers who are worried about their jobs stop spending, and companies worried about tariffs defer investment. That’s the danger of uncertainty.
It's important not to overreact in these situations because as quickly as Trump implements tariffs and starts trade wars, he will reverse them when he achieves his objectives. Markets will respond to this accordingly and can potentially jump back up as quickly as they fall. We are starting to see countries kowtowing to Trump and making offers to gain favour. I think that's probably a mistake. Trump just wants the best deal, and he will see offers as weakness and hold out for more. So, this process will take time and governments and in turn investors will need to be patient. It won’t be resolved as fast as markets would like and Trump is aware of this. He’s flagged the short-term pain for long term gain to steel the country for the turmoil ahead.
For our investors, their portfolios are underpinned by stocks with solid earnings, and those fundamental drivers haven’t changed. If the economic impact is a recession that will impact everyone, but it's not my base case. The short-term pain in markets is the opportunity we have been waiting for and a chance to buy stocks at cheaper prices. We have plenty of cash on hand to add to our holdings in times like these, and to ensure if markets continue to fall in the weeks and months ahead, we have funds available to continue buying.
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