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Markets and macro insights with Bernard Swords, Chief Investment Officer
What were the major developments last week?
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It was a roller-coaster week in equity markets. At first, further falls occurred in response to the US government’s recent tariff announcements. A sharp turnaround ensued when the range of high tariffs above 10% were paused – except in the case of tariffs on Chinese imports, which have been drastically increased in a tit-for-tat escalation.
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The pause has lowered tensions on the market but these remain at an elevated level. At the same time, the stand-off between the US and China threatens to destroy trading relations between the two countries altogether. It appears that we will see a full response from the EU next week, followed by US reaction. This will provide clarity as to the outlook, but it will be a nervous journey.
What is the outlook for the US economy now?
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As a result of market recovery from steep falls last week, growth forecasts for the US economy are being nudged back up, especially on the part of those sources that had previously offered the most conservative predictions. This provides some reassurance that we might be seeing the worst of the uncertainty at the moment, and that already-existing forecasts had built in a relatively pessimistic outlook, thereby giving us a sense of what to expect longer-term, even in regard to worst-case scenarios.
What are the constraints on US government policy?
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Last week’s developments may also have demonstrated that there are limits to the US government’s room for experimentation with the tariff policy. Unusually, the US bond market sold off sharply despite volatility and steep falls in the equity market.
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Tuesday was a particularly painful day for US bonds, and policy was adjusted the following day. Just as in 2022, then-UK-prime minister Liz Truss discovered that there are constraints on fiscal measures when they begin to affect the cost of government borrowing, President Trump may have found that the bond market determines the latitude of his policy. Future statements from US government sources may be more circumspect as a consequence.
What is Goodbody’s overall assessment of the investment outlook?
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Goodbody’s asset allocation committee met last week, providing indispensable consultation at a time of peak uncertainty and stress in the market. Although the meeting took place before Wednesday night’s positive change, the unanimous view was in any case that the current economic difficulties will amount to a temporary slowing in expansion rather than the beginning of a prolonged economic downturn.
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Consequently, the corrections in equity markets should provide a buying opportunity. Clarity about EU-US trade relations will be helpful before any changes in asset allocation are decided.
What measures has Goodbody taken in response?
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Our strategy has been to move some euro area equity exposure to the US. The US equity market has under-formed the euro area by c.15% since the start of the year, which is a large shift in a very short space of time. Growth forecasts have been cut more for the US economy than elsewhere so some level of underperformance would be expected. Nevertheless, the predicted level of underperformance has become too extreme, and we must remember that the rest of the world is not immune to a weaker US economy.
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It should also be kept in mind that the US equity market has the highest exposure to ‘new economy’ fields, which are less affected by the broader trends of economic activity.The mini recovery in equity markets during the week tells us what will happen in the event of a sustained recovery. Those sectors or regions that fell the most year-to-date bounced the hardest. Therefore, once recovery mode sets in, we can expect the US to be the strongest region, with the IT and Communication Services and Industrial sectors leading.
What new information was released last week?
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Data has been less important to the markets than the developments regarding tariffs, but we did see positive inflation data from the US for first time in many months. Core inflation only rose 0.1% month-on-month bringing the year-on-year rate down below 3% (2.8%). Obviously, tariffs are going to have a big impact, but at least we were on a softening trend as those effects unfold.
The week ahead: what to watch out for
This week, the Q1 reporting season begins, which will clarify the consequences of the trade dislocation and the general uncertainty faced by individual companies. From the US, we will receive data on Retail Sales and Industrial Production. From China, we will see GDP statistics and trade data, which should be strong due to pre-tariff demand. In the euro area, we will see data on Industrial Production.
