As of 13 March 2025
In Summary
Equity markets have retreated sharply from all-time highs as rapid-fire US tariff announcements have raised growth concerns and undermined the ‘American exceptionalism’ market narrative. Investors are increasingly concerned the Trump administration’s aggressive and uncertain trade policies will tip the US economy into recession. Whilst we see a rising risk of escalating trade wars, this scenario is not our base case scenario for the global economy.
The current environment is expected to remain unpredictable as investors grapple with whipsawing tariff policy and its potential economic impacts. There are, however, positive factors that support a constructive medium to longer-term outlook.
We are actively monitoring key indicators and market movements that may affect portfolios while maintaining a diversified risk-aware approach to portfolio positioning.
Balancing pro-growth policies and aggressive tariffs
US trade and economic policy has been a major force in driving the direction of global financial markets. US equities were buoyant post the election, driven by expectations the Trump administration would implement pro-growth and market-friendly policies. These policies included deregulation, tax cuts and increased fiscal stimulus. While investors viewed tariffs as a headwind to economic growth in the short term, expectations were positive that the balance between policy actions would result in a net positive for US growth over the medium to longer term. However, this optimism has been undermined by the front-loading of aggressive tariffs and increasing ambiguity surrounding the implementation and timing of pro-growth measures.
Weakening economic data
Recent economic data has also raised market concerns about the possibility of a US recession. Consumer sentiment and spending data have disappointed while leading indicators of GDP growth suggest a potential deceleration in US economic growth. Looking forward, we would need to see further evidence of economic stress to justify raising our probability of a US recession.
The impact of the Department of Government Efficiency (DOGE)
The potential weakness in the US labour market has also become an increasing concern. The efforts of the Elon Musk-led DOGE to cut government spending and waste will result in a sharp rise in government worker redundancies. This presents an additional headwind to the US economy.
The “Trump Put” ends
US equity markets experienced a strong rally since the US elections driven by investor optimism, which helped lift other equity markets, including Australia. The chart below shows how the rally has faltered, with US equities retracing their post-election gains as investors come to realise the “Trump Put” is no longer a backstop for equity markets. This refers to the idea that Trump monitors the equity market closely as a barometer for his success and that a falling market would instigate actions from Trump that would support investor sentiment.
Recent statements from Trump, however, suggest he is aware of the potential economic disruptions from ongoing trade disputes, inferring that short-term disruption may be required for longer-term gain. Investors have reacted negatively to these comments which failed to provide reassurances about the economic outlook. Despite some of these statements subsequently being walked back, markets have become more cautious in their interpretation of Trump’s erratic comments.
US equity market (S&P500) following Trump’s election
Complacency gives rise to fear
The past two years have delivered strong gains with low volatility, leading to the all-time highs achieved in February 2025. Since then, both the Australian equity market (S&P/ASX 200) and the US equity market (S&P500) have experienced significant drawdowns, pushing both markets into technically oversold territory. However, as the below chart suggests, the current drawdowns to date are in line with historical experiences.
S&P500 and S&P/ASX 200 – drawdowns
The chart below shows the movements of the CBOE Volatility Index (VIX), commonly known as the “Fear Index”. It has recently spiked, illustrating the rise in ‘risk off’ sentiment. Alternative gauges of market sentiment, such as the short-term performance of government bonds vs equities, are similarly signalling a strong bid for safe-haven assets. This volatility spike is not out of the ordinary and is currently at a level reached many times over the last five years. Within this volatility, there has been a rotation out of previously high-performing sectors into more defensive areas of the market.
CBOE Volatility Index (VIX) – spiking volatility
Positioning for an uncertain outlook
Despite rising concerns, there are divergent views as to the probability of a US recession. While we see the probabilities of a “Trade War” scenario rising along with its second-order impacts, it is not our base case.
The current environment is expected to remain unpredictable as investors grapple with whipsawing tariff policy and its potential economic impacts.
There are, however, positive factors that support a constructive medium to longer-term outlook. These include healthy corporate balance sheets, reasonable earnings growth, the potential for further global monetary policy easing and an improving economic growth outlook from non-US economies, albeit from a low base.
The current investment landscape requires a risk-aware approach where diversification is paramount. We are actively monitoring key indicators and market movements that may affect portfolios and positioning. Portfolios are structured with a longer-term perspective while positioned for both short-term volatility and new investment opportunities.
