Uncertainty set to continue for markets?

It’s been a volatile couple of weeks for markets with the declines since the so-called tariff “Liberation Day” punctuated with sharp rallies as markets react to tariff talk on both sides of the globe.

In the first instance there was a hope that perhaps some countries would adopt a wait and see approach to the US, and the imposition of a policy that can only be described as barmy on any number of levels.

While one can have some level of sympathy for the US when it comes to the way certain economic blocs conduct their trade policy, whether it be the EU or China, the way the US administration has gone about dealing with it isn’t covered in any economic playbook, or any other playbook for that matter.  

With China deciding to increase its own tariffs on US goods from 84% to 125% any future escalation on either side is now performative more than anything else given the size of any tariffs amounts to a trade embargo in all but name. This is likely to have significantly serious consequences for both sides, as well as the rest of the world, particularly in terms of supply chains which could be disrupted. .

The EU could have decided to adopt a wait and see approach when it comes to see how this was likely to play out, and appeared to have decided to retaliate with tariffs of their own before President Trump's unexpected announcement of a 90-day delay, which appears to have been in response to sharp moves in the Treasury market which has seen longer term yields spike higher.

Even now there is little sign of a slowdown in this upward pressure on yields while the US dollar has sunk to a 3-year low, as investors lighten their exposure to US assets, as confidence in its haven status comes under scrutiny in the wake of recent market turmoil.

If EU politicians had any sense they would be well advised to sit on the sidelines while all of this plays out given that the current economic uncertainty created by the US administration is likely to tip the US economy into recession.

Not to mention the weakness in US stock markets is likely to clobber the value of US workers 401k’s, which in turn will create a backlash of its own. For now, the US economy looks reasonably strong, however we’ve already seen a sharp slump in consumer confidence, and with the effect of tariffs still to be felt Trump could find that his popularity slips quite sharply.

This more than anything else will probably force a rethink on the part of US officials, not tit for tat retaliations to policies that only create economic self-harm.

If someone is digging themselves a hole as the US government is doing with its tariff policy, the last thing you should do is jump in there with them with a shovel of your own, as EU policy makers seem keen to do.

The big question now for markets is whether we’ve seen the worst of the recent losses, and if we have, whether it’s time to feed money back in.  

It’s always the case after these types of moves that the question gets asked as to whether it’s time to put money back into the market, or whether we have further to fall.

There’s no easy answer to this sort of question, given that these falls in the UK market are the biggest since Covid when the FTSE100 briefly fell below the 5,000 level, having fallen from levels of 7,700 in the space of 4-weeks.

This recent weakness is set to see the FTSE100 close lower for the 6th week in a row, having hit a record high of 8,908 last month, before slipping back to close at 8,583.   

Since that close we’ve seen the FTSE100 drop over 1,000 points at one stage making a low of 7,539 earlier this week, where we’re now struggling to retake the 8,000 level.

If we are to have any sort of confidence that the worst is over then it would be nice to see the FTSE100 regain a foothold back above 8,000 in order to kick back on to the 8,400 area.

Given the current mood and the prevailing mood of uncertainty that doesn’t look likely in the short term, which means we’re likely to see further choppiness in the weeks and months ahead, with US markets particularly vulnerable given their higher valuations.

As with anything, investing requires confidence in the economic outlook, as well as responsible stewardship of the companies one invests in, which means its less about timing the market, and more about time in the market.

The longer you are invested in the stock market the more likely it is that the money invested will generate a return over time. Buying good quality companies generally pays off over a long-term time horizon which means everything else is money and risk management.

The only reason to sell is if you have to, or your investing criteria changes.