As global trade negotiations stoke stagflationary fears and drive market volatility, a trusted investment adviser can help guide you along your journey.
Going into the year, market participants were expecting a continuation of US exceptionalism bolstered by US President Donald Trump’s second term in office. The narrative shifted swiftly from deregulation and tax cuts boosting the economy to recession fears exacerbated by policy uncertainty.
As investors began doubting US growth and equity strength, investors rapidly moved out of crowded trades such as the ‘Magnificent 7’.
Markets were caught off guard by the magnitude and broad-based extent of the reciprocal tariff policies announced on April 2, otherwise proclaimed by the president as the US ‘Liberation Day’. Then again Trump has been remarkedly consistent about his world view on tariffs since the 1980s and placed tariffs as a cornerstone of his vision for American economic revival and national self-reliance in the 2024 electoral campaign. Markets sold off aggressively amid concerns of retaliatory tariffs and prolonged negotiations fuelling stagflation fears.
Trump escalated the trade war between global economic leaders US and China, leading to a de facto mutual trade embargo as they trade unsustainable triple-digit tariffs. The US Administration appears hell-bent on bringing down longer-term interest rates and addressing the gaping federal deficit, even at the expense of market turmoil and economic pressure.
To this end, Trump has publicly put incessant pressure on Federal Reserve (‘Fed’) chair Jerome Powell to “stop playing politics” and lower interest rates, even threatening his dismissal, thereby effectively undermining crucial Fed independence.
So far, the Fed has remained steadfast in managing its dual mandate of maximum employment and returning inflation to its 2% objective, opting to maintain interest rates at 4.25%-4.5% since December 2024, citing increased stagflation risks.
For long-term investors, it is important to look beyond the endless news cycle and stick to their personal financial and investment plans
Following turmoil in the all-mighty bond market and a double-digit drop in US equities, Trump had to adjust course meaningfully. The US Administration put a 90-day pause on tariffs over and above the 10% base to allow for trade negotiations save for China, pivoted on firing Powell and showed signs it may soften its trade stance on China.
Trade talks between these two largest economies in Switzerland this weekend is a meaningful step in the right direction. This series of ‘Trump puts’ led stocks to recover effectively all losses and caused credit spreads in fixed income markets to retrace much of the widening seen since Liberation Day.
Volatility has effectively characterised both the fixed-income and equity markets as economists and investment strategists revise their forecasts and the bond and stock market vigilantes exert meaningful pressure. The sharp deterioration in confidence is weighing on investment and spending decisions and is reflected in negative commentary from companies announcing their Q1 earnings, as well as slashing or outright withdrawing their guidance for the year.
Economic data released in April showed signs of moderation as the flash composite Purchasing Managers’ Index (PMI) fell to 51.2 in the US and to 50.1 in the eurozone. Meaningful progress on trade negotiations, easing monetary policies and supportive fiscal measures may provide economies with the necessary support before concerns reflected in the depressed soft data materially impacts the hard data.
For long-term investors, it is important to look beyond the endless news cycle and stick to their personal financial and investment plans. In periods of elevated volatility, the benefit of having a professional trusted adviser to act as a guide in navigating turbulent markets comes to the fore.
Maintaining a balanced and well-diversified portfolio with regional diversification in equities to mitigate US policy risks and quality fixed income to deliver effective diversification and capital preservation is critical.
Alternatives, such as high-performing gold, also have a role to play. This allows investors to stay the course and capitalise on investment opportunities with solid fundamentals at attractive valuations when greater clarity on policy outcomes and economic trajectory is achieved.
Josef Luke Azzopardi leads the Investment Strategy and Research Unit at Bank of Valletta plc. The author and the company have obtained the information contained in this article from sources they believe to be reliable, but they have not independently verified the information contained herein and therefore its accuracy cannot be guaranteed. The author and the company make no guarantees, representations or warranties, and accept no responsibility or liability as to the accuracy or completeness of the information contained in this article. The author and the company have no obligation to update, modify or amend the article or to otherwise notify readers thereof if any matter stated therein, or any opinion, projection, forecast, or estimate set for the herein changes or subsequently becomes inaccurate.
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