Trump makes trade policy ever more uncertain

So far, the effect on stock markets has been particularly damaging for US equities. They have been hit harder than during Trump's first trade war in 2018. The S&P 500 index is down by more than 8% (in euros) since the start of the year, while the MSCI All Countries index excluding the United States is holding up better (+1%, in euros). Wall Street has thus recorded its worst start to a year relative to the rest of the world since 1988!

The IT and artificial intelligence sector, which was very popular until recently, is also struggling, with the “Magnificent Seven” (i.e. Alphabet, Amazon, Apple, Meta Platforms, Microsoft, NVIDIA and Tesla) losing 18% of their value over the period.

While the tariffs imposed by Trump in 2018 did not have a significant impact on the share performance of international companies generating a large proportion of their revenues in the United States, the opposite is true today. The uncertainty generated by US protectionism and fears of a possible recession in the US are beginning to penalise them too.

Shares in European groups that are very active on the other side of the Atlantic (up 5% this year) are underperforming shares in continental companies that export little to the US (up 11%) by 6%.  This is a radical change from what happened between January 2018 and June 2019. At that time, they had outperformed by 14% as US growth held up well against the tariffs.

This shows the extent to which President Donald Trump's ‘America First’ strategy is, paradoxically, making investors wary of US equities and companies that generate a large proportion of their revenues in the United States. The optimism generated by Donald Trump's pro-growth policies (lower taxes and deregulation) is already a distant memory.

The rise in customs duties and the redundancies in the US administration are now leading to fears that this could undermine the confidence of economic players and ultimately prove to be a source of stagflation - a period characterised by weak growth and inflationary pressures.

This fear is already perceptible on the stock market, with stocks that thrive in a period of stagflation (such as precious metals, industrials and defensive sectors such as healthcare) outperforming the most vulnerable stocks in this scenario (such as IT, energy and consumer durables) by almost 15% (in euros) in the US since the start of the year.

Another sign of this concern is that safe havens such as gold (up 14% since the start of the year) and investment-grade bonds are also increasingly sought after by investors.

Stock prices are softening because the increase in tariffs imposed on the United States' trading partners will inevitably disrupt supply chains and have an impact on corporate profit margins, as was the case in 2018. Between January 2018 and the partial removal of tariffs in mid-2019, 12-month estimates of profit margins had contracted by 70 basis points (100 basis points = 1%), both in the US and internationally.

Today, international profit margin expectations have fallen by 8 basis points from their September 2024 peak, while in the US they have risen by a further 24 basis points. Given that the increase in customs barriers is stronger and more massive than in 2018, we can therefore expect the situation to reverse and deteriorate more significantly on both sides of the Atlantic. With trade uncertainty at an all-time high, this is likely to weigh on business and household confidence, investment and spending, leading to lower industrial production and consumption in the US and the rest of the world.

Despite the bearish sentiment prevailing on the markets, the fundamentals do not suggest that a recession is imminent in the United States. Economists surveyed by Bloomberg put the risk of a recession within 12 months at 30%.

What's more, there are signs that Wall Street is keeping its cool. The S&P 500 Volatility Index (VIX) is a case in point. Nicknamed the ‘fear indicator’ because it measures the volatility of major US share prices, this index remains at lower levels than those seen during previous episodes of stock market turbulence. It stands at 22, compared with a historical average of 20 and a peak of over 80 during the Covid-19 health crisis.

Nor are we seeing any panic selling, but rather a gradual correction, as the S&P 500 and MSCI World All Country indices have lost more than 2% in just two sessions since the start of the year.

The recent correction could continue for a while longer, as it will take time for the markets to fully decipher the impact of the US administration's new decisions and, above all, to take on board any retaliation by the countries affected by the increase in tariffs. The negative scenario for the market would be that April 2 marks the start of a long period of negotiations during which the tariff structure with the United States remains unclear. If this were to be the case, we could expect increased volatility on the markets. But it could also become a buying opportunity if investors are convinced that a recession can be avoided. Provided that the US measures are delayed or give rise to sufficiently large exemptions, it is not impossible that this could lead to relief among investors and a stock market rally.

This is why ING's fund managers continue to favour equities and especially bonds over cash, while protecting portfolios against the instability caused by Donald Trump's trade choices.

• In recent months, we have reduced the cyclicality of our portfolios by reducing exposure to the United States and to the information technology and energy sectors.
• At the same time, we have strengthened the defensive bias of our asset allocation by increasing the weighting of certain equities considered less expensive (relative to their fundamentals), particularly in Europe and in the financial and healthcare sectors.
• On the bond side of our portfolios, we continue to prefer investment-grade bonds (with ratings above “BB+”), as they offer lower volatility and an attractive average yield (4%). Especially if we remember that this was 1.7% at the end of 2020, or if we compare it with the average yield on sovereign bonds (3.4%) and the expected dividend yield on equities (2%).
• In the commodities market, gold (and precious metals) remains our favourite asset, as it traditionally performs well in times of political and economic instability. All the more so when, as is currently the case, central banks are buying them on a massive scale.