"Liberation Day" Put on Hold

Donald Trump's reversal has caused widespread relief in financial markets. The American president decided to suspend his tariff war for 90 days - except with China, which faces tariffs of 145% - causing major stock indices to rebound sharply on Wednesday. The S&P 500 regained 8.6% (in euros), a movement of unprecedented magnitude since October 2008, and the MSCI index of major global stocks appreciated by 4.8%.

The relief in the markets matches the fears that had been driving them in recent weeks. In this regard, it is useful to recall the sequence of events. On April 2, Donald Trump declared the "economic independence" of the United States and unveiled new tariffs against about sixty countries with which the United States has a trade deficit. Instead of pleasing American markets, this announcement deeply destabilized them. The S&P 500 index and the 'Magnificent Seven' have indeed lost up to nearly 20% and 30% (in euros) of their value since the beginning of the year, significantly more than the rest of the world (-8%). The dollar fell by 8% against the euro. Even US government bonds, which were previously considered the ultimate safe haven, began to arouse investor distrust, with long-term US rates jumping from 4% to 4.5%.

These extreme movements were understandable given the historic decision of the Trump administration to raise the average rate of its tariffs from 2.5% last year to over 20%, something not seen in nearly 100 years! Especially since China, the main economic rival of the United States, quickly retaliated by also raising its tariffs on US exports. This irritated Donald Trump, who responded in three stages by imposing a tax of 104%, then 125%, and finally 145% on Chinese exports. This means that Americans will now pay nearly three times more for products imported from China! This suggests an increase in inflationary pressures and a slowdown in activity, or even, in the worst case, a recession!

Markets that had not anticipated such a scenario were forced to revise their profit growth forecasts downward. For now, despite the 13% (in euros) contraction of the S&P 500, expectations still indicate nearly 11% profit growth for the S&P 500 in 2025. For these forecasts to be correct, it is imperative that the trade war does not intensify again!

Donald Trump's change of course reduced stock market volatility: the VIX index, which measures the volatility of the S&P 500, fell from over 50 to 30, after doubling in the space of two weeks. Although this indicates a decrease in stock market stress, markets remain cautious. As long as Donald Trump has not buried the hatchet of the trade war or a compromise has not been found between the different economic zones, volatility will not completely disappear. A scenario for which the investment strategy has prepared step by step...

• ... by reducing the cyclical dimension of portfolios, with a decrease in the weight of stocks at the end of last year, and a reduction in exposure to US stocks and IT and energy sectors at the beginning of the year. 
• ... and by increasing the defensive dimension of portfolios, through the purchase of assets with lower valuations such as European stocks, as well as healthcare and finance stocks. Not to mention, of course, high-quality credit bonds and gold, which fully play their role as shock absorbers.

Even if markets remain at the mercy of Donald Trump's decisions and the reaction of his trading partners, investment opportunities should gradually appear. Many bad news are already priced in and market sentiment has already deteriorated significantly. It will undoubtedly take time to achieve this, but the various protagonists should gradually abandon their aggressive rhetoric to return to a more cooperative approach. All parties involved have much to gain, and the United States even more so!

Knowing that the long-term return on stocks depends heavily on the 10 to 20 best trading sessions, it is important not to miss them! This is why the investment strategy tactically made a first round of purchases at the beginning of the week. Despite the many crises experienced over the past 20 years, the MSCI index of major global stocks shows an average annual return of 8.5% (in euros) over the period!