Reviewing the “Trump Affect”

Market volatility has been a key talking point in recent weeks, particularly in relation to new U.S. trade policy announcements. This article explores the impact of those developments – what’s happened, how it could affect the global economy, and what it might mean for investors going forward.

At the time of press this could be old news as markets move fast but this month, I have reviewed the recent volatility that no doubt all readers have heard about over the last few weeks. What does it mean both now and for the future.

So what happened?

President Trump delivered his “Liberation Day” announcement, ending weeks of anticipation and speculation. The measures were toward the more extreme end of expectations. I will try not to reprise what is widely available in the press, but it’s worth a quick reminder on the background.

Very early in his second term, President Trump ordered the US Trade Representative to investigate potential trade frictions imposed by America’s trading partners which might cause their exports to America to be more competitive than America’s exports to them. He asked for it to be a thorough review going beyond tariffs to also include non-tariff barriers.

What was announced?

Despite decades of progress in reducing tariffs and trade barriers, there remain frictions and to some extent these are inevitable.

• At the end of March, this report was produced and based upon it, the administration have determined that every country exerts protectionist policies which the US needs to reciprocate.
• The impact of this is significant. The average tariff suffered by US imports has risen by around 20% so far during his second term.

How will this affect the economy?

Best estimates of the impact on growth from these tariff measures is that they could reduce US GDP by around 3% while prices are likely to rise by more than 1.5% due to the measures. These figures are relatively easy to estimate as they reflect the increase in prices and taxes. The potential offset to this would be if the government were to return the tariff revenue to the economy through tax cuts

Ordinarily we would expect currency appreciation from the country imposing a tariff (less dollars get exchanged for foreign currency to buy imports) but it is striking how the dollar has fallen sharply since it became clear President Trump would take on all countries simultaneously. This reflects the fact that US growth is expected to suffer more than the growth of US trading partners. The US will suffer an increase in taxes and prices relative to all of its trade. It will also face retaliatory measures from many countries (the Eurozone and China have already confirmed this). Trading partners will only suffer this in relation to their trade with the US.

What happens next?

Above all the two key truths about Donald Trump remain as relevant now as ever:

• He has a fetish for tariffs (which he is currently indulging).
• He loves to negotiate.

There is no question that the impact of these tariffs is negative for the global economy. There are environmental and social consequences of trade, but it is economically positive, and its curtailment is a headwind. He has already signalled his willingness to negotiate and the unpopularity of prices increases should encourage him to come to the table, so it would not be surprising to see these tariff rates reducing over time in a succession of triumphant announcements.

How will this impact investments?

 Markets had been bracing for this announcement for weeks. Now that it has landed it was towards the more extreme end of what investors considered possible and that has weighed on the markets over the last few weeks. The impact on companies is complex and varies stock by stock. The impact does not depend upon where companies’ shares are listed, or even where they sell their goods, but rather where they manufacture their goods.

After two years of strong stock market returns a period of volatility reminds us why it is useful to invest in diversified portfolios for example gold has given good protection to the volatile stock market.

These periods of volatility are stressful, but they also offer opportunities, so at Pure Wealth we continue to be vigilant in our assessment of the big picture as well as individual investments.

My advice is as follows

• Don’t let short term noise remove yourself from your long-term objectives.
• Review the risk you have accepted in your portfolio is this still correct?
• Look back on the history of markets, they do not act in a straight line and this event is likely to be a small blip on an ever-growing line.
• Speak with your financial adviser for advice and recommendation. Or even better speak to us…. on 02922 671957 or [email protected]