Over the last few days and weeks, we have seen a dramatic ‘decoupling’ of US equities from most of the rest of the world. Major indices in the US (the S&P 500, the NASDAQ and the Dow Jones) have been falling fast, shedding trillions of Dollars of market capitalisation.
But why?
Well, a couple of reasons, in no particular order of importance, and by no means exhaustive:
– Tariffs: Historically, tariffs have been used as an economic ‘weapon’ to manage and mitigate trade surpluses and deficits. While these have often worked as intended in the distant past, the world has shifted to a broad economic model of Globalisation. What this means is that, over time, countries have become reliant on each other when it comes to trade. ‘Absolute’ advantage refers to one country having something (resources, materials, goods etc) that another country doesn’t have (and needs). ‘Comparative’ advantage means that while two countries can produce the same good, one of the countries can produce it better (‘better’ meaning cheaper, quicker, higher quality etc). So, countries tend to focus on what they do well (think Taiwan with semi-conductors), and import the balance/rest. That’s an overly simplistic explanation, but it illustrates the point.
– Inflation: Tariffs are, by and large, inflationary. Why? Because the importer pays the tariff to the government. The idea here is that if you make the imported product more expensive, you raise demand for local goods. While this thinking is simplistically sound, it ignores the fact that increased demand leads to higher prices (I know this, because reality, common sense and basic 101 economics told me so). Having battled inflation for over two years, the Fed is now looking ahead to an environment where inflation is a genuine risk (again). Should this happen, they will have little option but to consider raising rates. This, as we know, is bad for risk assets.
– Uncertainty: Markets, above all else, abhor uncertainty. With President Donald Trump ‘flip-flopping’ on tariffs, investors have no idea what the horizon holds. Manufacturers, businesses and firms need to put in place plans for the future that encompass 3, 5 and 10 years into the future. A week where tariffs have been threatened, withdrawn and threatened again is simply not an environment for putting in place long term plans.
– Massive job cuts: President Trump has appointed billionaire Elon Musk to head the unfortunately named Department of Government Efficiency (or DOGE). His mandate, ostensibly, is to cut waste, fraud and corruption out of the federal government. Now, cutting waste, fraud and corruption is objectively good, right? Yes, correct. However, how to you go about doing that? Well, instead of using a scalpel to remove the offending elements, Musk took a chainsaw to it. Widespread emails offering severance packages, mass layoffs in certain departments (USAID, Education etc) and attempts to cut Social Security and Medicare risk eroding confidence in the new administration’s ability to properly and conscientiously shrink the government’s wage bill.
– A shift in the global world order: At a recent meeting of the UN Security Council, the US voted in line with Russia, North Korea and Belarus. China abstained. Ever since the end of Second World War, the US and Europe have voted in lockstep with one another. Now, we’re seeing a massive shift. What does this mean? That’s a very difficult question to answer. The US is, of course, entitled to put itself and its citizens first. Every country should do that. However, with a global economy as intertwined as it is, ‘putting yourself first’ invariably means relying on other nations to plug the gaps you have (energy, metals, produce, military equipment etc).
Have a look at the graph below. It maps out the performance of China’s Hang Seng, a group of major non-US indices, and then the S&P 500 and the tech-heavy NASDAQ, from January 20th (Trumps’ inauguration) until March 11th:
Some key points to note:
– The S&P 500 posted >20% returns in 2023 and 2024. This has only happened 3 times since 1950.
– The S&P 500 is still trading at around a 26x P/E, compared to its historical average of around 18x. This means that, even though we’ve seen around $4 trillion wiped off the index, it’s still ‘expensive’ by historical standards.
– The S&P 500 is (as of today) trading at just below its 200 daily moving average (DMA). In ordinary times (no, not like these) this would be a strong ’Sell’ signal.
So, what do we do now?
Well, firstly, we don’t panic. Panic is not an investment strategy. Across our portfolios, the majority of clients are well diversified across asset classes and geographies. While the US (and mostly US tech) has been the global growth engine for some years now, a more expanded view of this new investment terrain may be useful. Going forward, we, along with our international partners, will be looking at different tactical opportunities for our clients. In the long term, we still remain cautiously optimistic about the US, despite the short-term drama. While President Trump has shown us, he can be quite volatile, he also is a staunch American. And he will do whatever he needs to make sure that he oversees a healthy, growing and robust economy.
As always, we are monitoring the situation, trying to see through the ’noise’, and continuing to invest our clients’ money wisely and responsibly.
From the desk of Stewart Dando, Chief Investment Officer Austen Morris Associates International
