Navigating market volatility amid Trump tariff turmoil

In recent days, global markets have been rattled by a significant shift in US trade policy. President Trump’s decision to introduce sweeping new tariffs has sent ripples through financial markets and prompted strong reactions from key trading partners.

While the headlines may feel dramatic, it’s important to look beyond the noise and focus on what these developments really mean for long-term investors.

Since President Trump announced his new tariff rates, the global economy has been grappling with the implications of this significant policy shift. Governments, corporations, and investors are all trying to understand how these tariffs will affect them. Academics have drawn parallels to the protectionist regimes of the 1930s, highlighting the potential for widespread economic disruption.

As is often the case, it is uncertainty that is driving much of the market volatility we’re seeing, as businesses grapple with how tariff changes could impact their operations.

Countries like China have already retaliated with their own tariffs on US goods, while others are considering their options. The period before the application of reciprocal tariffs is crucial for evaluating potential flexibility from the US administration, and Trump has stated that those who come to the negotiating table earliest may get the best ‘deal’.

Initially, investors were hopeful that Trump's aggressive tariff stance was a negotiating tactic. Many believed that his self-proclaimed deal-making skills would lead to better trade agreements.

However, as some countries faced unexpected punitive tariffs despite concessions, optimism has waned. For example, India introduced concessions on import duties for several goods but still received a 27% tariff. This uncertainty has led to significant market volatility, with equity markets adjusting to the deeper economic implications.

As Trump's second term unfolds, it is clear that markets misjudged the extent to which he would prioritise equity market stability. The International Monetary Fund (IMF) estimates that tariffs at 20% could reduce global growth by more than 1% through 2026¹.

The Federal Reserve (the US central bank) is navigating a complex landscape of rising unemployment and persistent inflation. Chair Jerome Powell has indicated a cautious approach, holding interest rates steady amid heightened uncertainty. However, markets are anticipating potential rate cuts, reflecting a divergence between investor expectations and the Fed's stance.

We believe in the strength of a diversified portfolio. By investing across traditional and alternative asset classes, we aim to provide resilient foundations for weathering market instability.

Recent market pressures have further highlighted the benefits of diversification. As equity markets have come under pressure, sovereign bond markets have rallied, driven by both a reduction in growth expectations (which could lead to potential rate cuts which would increase prices of existing bonds) and a flight to safety.

The negative correlation between equities and bonds has provided a cushion for diversified portfolios.

We also incorporate alternative assets into our allocations, further enhancing diversification during turbulent times. While the price of gold has softened slightly in recent days, it has delivered strong performance year-to-date and has again helped offset equity weakness in client portfolios.

While predicting Trump's next move is challenging, we focus on identifying opportunities where market pricing is dislocated from underlying fundamentals. Near-term volatility can be unsettling, but it also creates opportunities for long-term investors.

Despite the apparent insensitivity to market sentiment, the scale of recent stock market falls and rising inflation expectations may prove to be a catalyst for policy adjustments. Trump's views are known to evolve rapidly and unexpectedly, introducing volatility but also potential opportunities for strategic investments.

As all investing carries a degree of risk and investors may not get back the amount invested, we are committed to guiding your clients through these uncertain times with a measured and strategic approach. By maintaining a diversified portfolio and staying vigilant to market changes, we aim to build portfolios that aligns with your client’s long term goals.

¹ IMF, World Economic Outlook, January 2025