Global equities continued their retreat last week, falling 1.7% in both local currency and sterling terms. This was their fourth consecutive weekly decline and left markets down 7.6% in sterling terms and 5.8% in local currency terms from their mid-February high.
The US has very much led the drop and the S&P 500 was down 10% from its high on Thursday, before bouncing 2% on Friday. In sterling terms even after Friday’s recovery, the US remains down 10.7% from its peak as its decline has been magnified for UK investors by the pound’s recovery against the weaker dollar. UK equities, by contrast, have fallen only 0.6% over the same period and European and Chinese equities are actually up 1-2%.
Bonds have offered a modicum of protection during the equity sell-off with UK gilts unchanged and US Treasuries up 1.5%. They haven’t provided more of an offset because inflation worries have risen along with concerns over growth. Renewed worries about the UK’s fiscal position have also not helped. Nor has a marked rise in German yields following the plans for a big rise in German defence and infrastructure spending.
Gold, however, has continued to shine and tested $3000/oz for the first time last week. Its gains since mid-February may only be a modest 2% but it is up a stellar 14% year-to-date.
Moving onto the key events last week, tariffs were yet again centre stage with the news as ever changing by the day. The 25% hike in US tariffs on steel and aluminium imports went ahead, prompting retaliatory action by both Canada and the EU which in turn provoked Trump to threaten additional hikes.
At one stage, the Canadian state of Ontario was even threatening to cut off its supply of electricity to the US, while the EU move to impose a 50% tariff on various US goods led to Trump threatening a 200% tariff on EU alcohol. The wave of tit-for-tat retaliation not surprisingly added to market jitters.
The next key date in the trade war is 2 April when the US should lay out its plans for reciprocal tariffs. Here the big uncertainty is the extent to which the US takes into account not just other countries’ tariffs but also non-trade barriers and taxes such as VAT.
The latest US inflation numbers provided a pleasant surprise with inflation falling a bit more than expected in February. The headline rate slowed to 2.8% while the core rate eased to 3.1%. The US also at the last moment managed to stave off the government shutdown which had threatened to start on Friday. Less encouragingly, US consumer confidence dropped in March to its lowest level since 2022.
Here in the UK, the latest GDP numbers made unwelcome reading for Rachel Reeves. Activity unexpectedly edged down 0.1% in January, reversing part of its gain in December. While GDP still remains up 0.2% over the last three months, the sluggishness of the recovery is adding to the Chancellor’s difficulty in meeting her fiscal rules. Spending cuts now look certain to be announced in her fiscal statement on 26 March.
Rather rashly, I said I would explore this week how much more US equities could underperform. Well, I’ve had the crystal ball out but unfortunately it’s a bit cloudy, most obviously because of the enormous policy uncertainty in the US. Indeed, the recent abrupt turnaround in investor sentiment and reversal of the previous consensus Trump-related investment trades highlight the folly of making precise predictions.
That said, we do have firm views on the two key calls at the moment. First, is a US recession now looming? We believe this remains unlikely, even if growth is now slowing significantly. If so, the backdrop of moderate global growth and declining interest rates remains a fundamentally positive one for equities. In the past, following a 10% decline, US equities have generally recovered their losses within six to twelve months – but only if there is no recession.
Second, will US exceptionalism resume? We believe it won’t. The US market remains excessively expensive even after the recent correction. Just as important, the Magnificent Seven are no longer looking so magnificent and US growth no longer looking so exceptional, particularly now Europe and China are finally putting in place sizeable fiscal stimulus.
Over the medium term, this means we expect equity markets to resume their upward trend and the upside potential to be greater in the cheaper markets outside the US. Even so, the policy uncertainty and the sharpness of the recent market moves all but guarantee there will be further volatility along the way.
We’ve said it before and we’ll say it again but a well diversified portfolio – not only at the asset class level but also in terms of regions, sectors and individual stocks – looks more essential than ever.
This coming week, central banks will be to the fore, with the US Fed and Bank of Japan meetings concluding on Wednesday and the Bank of England meeting on Thursday. Interest rates will almost certainly be kept unchanged in all three countries but the focus will be on their statements regarding the outlook, particularly in the US where the Fed will be releasing its latest set of forecasts.
Rupert Thompson – Chief Economist