Since mid-February, risk assets have faced mounting pressure as President Trump’s aggressive trade agenda and signs of US economic fragility weigh on sentiment. The S&P 500 has declined 17% and is set to fall further into bear market territory, the Nasdaq is off nearly 23%. Though European equities have shown some resilience, export-sensitive sectors such as autos and industrials have been hampered by trade uncertainty. Australian markets have also weakened, reflecting slumping commodity prices and concerns over China’s economic slowdown. The ASX 200 is down 15% in recent weeks. The Aussie dollar has fallen to 60 US cents.

 

Trump’s re-election initially sparked a rally, driven by expectations of pro-growth policies. However, the administration’s tariff-heavy stance is now at the forefront. Tariffs, effectively a tax on consumers and businesses, are clouding the outlook. Manufacturing data has softened considerably, the ISM Manufacturing PMI has fallen into contraction territory at 48.6%. While the services sector remains in expansion, confidence is eroding under the weight of trade fears and potential fiscal tightening.

 

The bond market is flashing caution: 10-year US Treasury yields have slipped from 4.7% to 4.3%, reflecting unease around growth, inflation, and Federal Reserve policy. Despite initial expectations for rate cuts, the Fed is holding steady, awaiting clearer signals from the economy.

 

The risk of a US recession was already rising with US households having run down their pandemic savings buffers and thanks to a further blow from the latest tariffs – which amount to a roughly $US600bn or 2% of GDP tax hike which is the biggest tax hike since 1968. A rough estimate is that the hit to US growth will be 1%, with a similar amount added to inflation. Global growth could be pushed towards 2% (from 3% currently) depending on how significant retaliation is and how countries like China respond with policy stimulus. The US will be harder hit with threats to nearly all of its trade, whereas other countries only see their trade with the US tariffed.

 

For Australia, the 10% US tariff on our exports is bad news for industries affected and there is likely more to come for pharmaceuticals (worth $2bn a year). However, only 5% of Australian exports go to the US worth about 0.9% of GDP and much of this will still continue albeit they are now more expensive in the US. So, all up the direct hit to GDP growth is probably only 0.1-0.2%. However, the bigger threat comes from the hit to global growth from Trump’s trade war, particularly in China and Asia, which will likely result in less demand for our exports posing a threat to the expected pick up in Australian economic growth. If we refrain from retaliatory tariffs on US imports (as appears likely), Trump's tariffs are more likely to hinder growth than boost inflation, supporting further RBA rate cuts. 

 

A 10% fall in US shares was not enough to put pressure on Trump and so far Trump and his key advisers don’t seem too concerned e.g. Treasury Secretary Bessent not seeing the tariffs causing a recession. However, several things will help the market eventually bottom and turn around: 

 

First the ongoing plunge at some point - particularly as it goes beyond a 20% fall with headlines screaming “bear market” - will start to pressure Trump resulting in some moderation in the tariffs and refocus on the market positive aspects of his agenda, like tax cuts and de-regulation. In this regard the pressures on Trump are growing with four Republican Senators voting with Democrats to reject tariffs on Canada, Europe moving to purchase its own rather than US weapons, Musk looking like he is on the way out and there are signs of negotiation with Vietnam.

 

Second, shares are becoming cheaper with falling PEs and falling bond yields, gradually restoring value.

 

Thirdly, the Fed at some point is likely to start easing again as fears about weaker growth will start to dominate tariff related inflation worries. The US money market is now allowing for more than four rate cuts this year.

 

But we are not likely at a durable bottom just yet and so shares are likely to see more downside in the short term before more positive forces around Trump’s tax cuts & more Fed rate cuts get the upper hand.

 

 

Sharp share market falls are stressful for investors as no one likes to see their investments fall in value and try as one may, it’s never easy to accurately predict economies and shares. So, at times like these it’s important to focus on basic investment principles.

 

1. Share market pullbacks are healthy and normal - their volatility is the price we pay for the higher returns they provide over the long term.

 

2. It’s very hard to time market moves so the key is to stick to an appropriate long-term investment strategy.

 

3. Selling shares after a fall locks in a loss.

 

4. Share pullbacks provide opportunities for investors to buy them more cheaply.

 

5. Shares invariably bottom with maximum bearishness.

 

6. Australian shares still offer an attractive income (or cash) flow relative to bank deposits.

 

7. To avoid getting thrown off a long-term strategy – it’s best to turn down the noise around all the negative news flow.