Markets Are Demanding Clarity on Global Trade—And the Sooner, the Better
Last week’s bottom line focused on answering six market questions regarding the recent volatility in markets, the sources of that volatility and what investors could expect going forward. At Friday’s close, all of the “answers” provided to those six questions were effectively reinforced.
First, uncertainty was cited as the most significant influence on markets in Q1’25, and last week we saw a relief rally take shape on hopes for “targeted,” less-severe tariffs being implemented in early April. However, stocks began to roll over on increasingly aggressive trade-war headlines midweek and accelerated lower into the weekend when economic data highlighted that tariff uncertainty has trickled through to materially weigh on consumer sentiment and business confidence levels (Final March Consumer Sentiment being revised lower was a noteworthy negative catalyst).
This added conviction to the answers to the second and third questions of “Why Have Markets Bounced?” and “Does This Mean the Correction is Over?” The takeaway from those two questions is good news, particularly on tariff policies and the expected impact they will have on consumer sentiment and on business confidence.
Regarding questions four and five, “Does This Mean the Bull Market Is Over?” and “How Should Investors Think About This Market?”, the answers are largely the same; by no means does the recent uncertainty-driven market volatility definitively mean the bull market is over, but at the same time, now is not a time to be complacent to risks of further downside in equities as volatility is poised to remain elevated until investors gain clarity on trade war dynamics, their expected impact on global growth in 2025 and the related risk that we could see a material resurgence in inflation pressures in the months and quarters ahead, which is the answer to the sixth question.
Bottom line, this week will prove to be critically important for markets and their path forward in 2025, as uncertainty has gripped investors and business decision makers alike in Q1, and everyone is hoping to gain more definitive clarity about the Trump administration’s broader tariff policy plans and general outlook for trade relationships going forward.
A “good” outcome with easing global trade tensions and progress towards new trade terms with major trading partners should result in a relief rally in stocks and temper the safe-haven bid in Treasury markets. This could come as soon as the April 2 reciprocal tariffs announcement this week. However, there is a dual risk that could reignite broad market volatility as 1) Any further escalation in trade tensions, especially with major trade partners China, Europe, Mexico and Canada would clearly be negative for risk assets and almost certainly send stocks to new 2025 lows, and 2) Even if there is no further deterioration in trade-war tensions, investors are inherently impatient when it comes to uncertainty. And with every day that passes without positive progress or clarity emerging, the risk that the subsequently reduced level of consumer spending and delayed business investment due to trade-war angst tips the economy into a recession due to a “self-fulfilling prophecy effect” will rise. The sooner we gain clarity on the path forward with tariffs and the subsequent impact they will have on the global economy, the better (hopefully this week).
Again, turn to my 5 keys to the markets this year to see the ultimate fate of the markets this year. There is way too much upside to worry about this short term volatility. Please, be patient as this is not going to be a sustainable downturn. I am not worried enough to pull the plug on our portfolios. That can result in missed opportunity.
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