From Rhetoric To Reality

Trumps’ first one hundred days of his second term has shaken global markets to an extent not seen since March 2020, and has even led to speculation that the US could lose its reserve currency status. Weekends seem to have become the "arch enemy" of markets. Threats and counter-threats emerge from nowhere, leading to big moves in both directions, at the most illiquid times of the trading day.

Yet, at its nadir on 8 April, the S&P 500 was pretty much unchanged since April 2024, and US Treasury yields were only 10-30 basis points higher, depending on maturity. The fear and the panic we have witnessed is at odds with the reality. All that has really happened, to date at least, is the unwinding of the Trump Trade.

On 22 April, a day or so after Trump suggested he would look to fire Jay Powell, he said that he had “no intention” of doing so. Bessent then came out and declared that the US and China would soon find ways to “de-escalate” the stand-off on tariffs. Not surprisingly, markets have bounced.

But where does this leave us? Maybe Bessent has spelled out the inconvenient truth of the path the President was taking? With Musk also saying his time at DOGE was ending, and that he would be re-focusing on his job at Tesla, perhaps a degree of sanity has set in? Could this be the beginning of the end of the chaos?

Perhaps. Perhaps not. Predicting what Trump might do or say is a foolhardy pursuit. Even the President himself most likely does not know.

But one thing we do know, is that in the months ahead, the consequences of the threats of trade war, the global loss of trust in the Administration by friend and foe alike, coupled with the extraordinary disruption to the lives and livelihoods of so many Americans, will come home to roost. Instead of reacting to the President’s rhetoric, markets will be focusing on the reality of the impact on the US and world economy.

Most large economies were showing signs of significant weakness well before Trump took office. The chaos of the first 100 days, the unfathomable uncertainties faced by businesses and consumers globally, plus the scale of disruption in the US from the swathe of domestic Executive Orders, do not augur well for economic activity in the US, or elsewhere. Economic forecasters, though only marginally more reliable than a broken clock, are expecting a period of gloom and doom. Probabilities suggest this time they might be right.

But be warned - 2025 will no doubt prove to be the annus horribilus for statisticians. Month to month numbers will be impossible to predict, especially those that are seasonally adjusted. Seasonally adjusting data has always been fraught with difficulty, dogged by what is technically called “irregulars”, one-off events, the impact of which is often impossible to estimate.

If the Trump rhetoric softens, and there are some small steps towards negotiated outcomes on tariffs, equity markets will continue to recover. Institutional investors will be under pressure to reduce underweights, hedge funds could rush to cover shorts, while retail investors will no doubt continue to ‘buy-the-dip”.

But it will be wise to remember that it is far too late to put the tariff genie back in the bottle. Nor will the Administration retreat from isolationism. Looking inward, rather than outward, has deep roots in American culture and history. And those periods of isolationism have not been periods of prosperity. Shortly before his assassination, President McKinley publicly admitted that his tariffs were a mistake. It is doubtful that his devoted admirer will do the same.

Since the GFC, equity markets have posted extraordinary returns, especially in the US. This was first driven by “free money” and ever-increasing debt. Then, by a remarkable “profit bubble” in a small number of global near monopolies. Momentum slowed as 2024 unfolded, as expectations of ever-increasing profits were confronted with the mathematical realities of compounding what were already very big numbers. As polls – public and private – suggested Trump was going to win, the Trump Trade was born, arguably pricing in an entire term of corporate-friendly measures. A final surge of excessive optimism. What used to be termed in markets, a “blow-off” top.

So, whatever happens in the weeks and months ahead, it will be wise to remember that a bear market is long overdue. And given the longevity of the remarkable bull market we have all enjoyed, if a bear market eventuates it is unlikely to be a short one.

Absent a global recession, it should also be borne in mind that inflation and interest rates are going to be structurally higher in the months and years ahead. Stagflation remains a possibility. With structurally higher rates, and a weaker economy, the downturn in the credit cycle, which is yet to fully play out, will be more severe.