Trump’s first 100 days have seen a roller coaster ride in share markets. Trump’s term started with optimism evident in share markets hitting record levels on expectations that he would focus mostly on the positive aspects of his agenda – tax cuts and de-regulation – with tariffs taking a back seat. This turned out not to be the case as he announced far more aggressive tariffs than he indicated in the election campaign. This along with a messy and confusing delivery and uncertainty about the end point saw shares plunge and bond yields start to surge as investors fretted about recession and a loss of confidence in US economic management and the status of the US as a safe haven. Trump and team then got worried at the prospect of financial panic, a bear market and recession and have been back tracking over the last few weeks – with delays to allow trade deals, an openness to cutting the tariffs on China and a scaling back or exemptions from some tariffs (notably in relation to computers and smart phones and then autos). This has helped markets settle with US, global and Australian shares now having recovered more than half of their losses from their highs early this year to their early April lows and bond yields settling down again. Trump’s backdown is good news and indicates that financial markets (e.g. bond vigilantes) and fear of recession in the US still pose a constraint on Trump. However, it’s still too early to say that we have seen the bottom in share markets or end of the wider market turmoil.

 

In Australia underlying inflation continuing to trend down in line with the RBA’s forecasts, the March quarter inflation data is likely to have added to its confidence that inflation is heading sustainably back to target. So, with monetary policy still tight and Trump’s trade war pointing to downside risks to the growth outlook we remain of the view the RBA will cut the cash rate again by another 0.25% on 20th May with a further 2 or 3 cuts into early next year. Of course, none of this is to say that the “cost of living crisis” in Australia has gone away. Since 2020 average consumer prices are up 20% but average wages are up just 15%. Wages growth is now running above inflation but at the current rate real wages won’t catch up to their December 2020 level until around 2032. The only way to sustainably address this is to boost productivity!

 

Whilst US economic data has mostly been weak, US company earnings growth appears to be holding up well. 71% of S&P 500 companies have reported March quarter results with 76% beating expectations which is around average and consensus earnings expectations have risen to 9.55% YoY. That said numerous companies including Apple have highlighted the threat from the tariffs.

 

Shares are at high risk of further falls given the ongoing tariff war, increased recession risk particularly in the US and the risk of a US/Israeli strike on Iran’s nuclear capability if diplomacy doesn’t work. Even if the low has been seen, volatility is likely to remain high. But with Trump likely to ultimately back down further on the tariffs (after declaring victory of course!) and pivot towards more market friendly policies like tax cuts and deregulation, and central banks, including the RBA, likely to cut rates further, shares are likely to recover on a more sustainable basis into year end. But it’s likely to be a rough ride.

 

Bonds are likely to provide returns around running yield or a bit more, as growth weakens, and central banks cut rates.

 

Unlisted commercial property returns should improve in 2025 as office prices have already had sharp falls in response to the lagged impact of high bond yields and working from home.

 

Australian home prices have started an upswing on the back of lower interest rates. But it’s likely to be modest with US tariff worries constraining buyers and posing a near term threat of a reversal in prices and affordability remaining poor. We see home prices rising around 3% this year.

 

Cash and bank deposits are expected to provide returns of around 4% but should slow as the cash rate falls.