CIO Alert: Mind the Gap

‘Donald Trump has committed the most profound, harmful, and unnecessary economic error in the modern era. Almost everything he said, on history, economics, and the technicalities of trade, was utterly deluded’. (The Economist, Ruination Day, 5 April 2025)

What is happening?

Be careful what you wish for is the message emanating from Wall Street. Feint hopes of a watered-down version of reciprocal tariffs set to be unleashed on America’s trading partners on April 2, labelled ‘Liberation Day’ by the Make America Great Again (MAGA) team, were dashed by a howitzer from the President.

In true Trump fashion, the Donald held up a gameshow-style poster board outlining the tariffs the administration contends are ‘charged’ to the U.S., as well as a column of aggressive and far-reaching ‘discounted’ tariffs the U.S. would implement in response

Putting aside the methodology used, the long and short of it is a 10% baseline tariff on almost every one of America’s trading partners, though many nations such as China, Vietnam, and Taiwan are subject to far steeper rates.

Markets have taken fright, ignored any potential revenue benefits of tariff policies, and are focussing their attention on:

1. probable negative impacts to domestic and international growth,
2. inflation (higher, as ultimately these costs will need to be borne by the retailer and/or the consumer),
3. what a retaliatory response from those countries affected might look like (this is, ultimately, pure guesswork), and
4. the potential confidence shock to businesses and consumers.

Cuts to government spending and resulting job losses may amplify these issues. Companies struggling to absorb higher costs could face squeezed margins, lower earnings, lower capital expenditure, and additional equity pressure. Declining stock markets also create a negative feedback loop, leaving consumers feeling less wealthy.

Ultimately, the initiative is being widely interpreted as throwing sand into the gearbox of an already slowing global economy, whilst adding considerable uncertainty to the macroeconomic picture. At the time of writing, risk assets are, seemingly, in freefall with 3-day total returns from many major equity indexes in the -10% to -15% range, plunging many into official ‘bear market’ territory.

What Do We Think?

The fundamental goals of Trump’s tariff policy are seemingly to:

• Reshore critical industries including healthcare, technology, and defence, to America,

• Raise revenue to narrow America’s fiscal deficit, and

• Force other countries to move their tariffs lower, along with restrictive practices (e.g. regulation)

Prima facie, like many, we are sympathetic to each of these objectives, yet the medicine that Trump has prescribed currently resembles a cyanide pill. Furthermore, the accompanying rhetoric from the MAGA Team is leading many to conclude that the tariffs are here to stay indefinitely, that Trump is not done imposing tariffs, and that he is willing to drive the US economy into recession in pursuit of his policy goals.

Unfortunately, we do not possess a crystal ball. With that said, our working thesis is that Trump, author of the Art of the Deal, has leveraged America’s massive economic power to open negotiations with individual countries and governments. The current ‘reciprocal tariffs’ resemble an effective ‘trade embargo’ and if they remain in place for a sustained period, would almost certainly guarantee a deep global recession.

Whilst the news could easily get worse before it gets better, we suspect effective tariff rates start moving down in the coming weeks and months as deals with individual countries are cemented. China and the EU remain front and centre in this regard, with any climb down likely to be well received by markets (as I type this, there are headlines suggesting that Trump may impose a 90-day tariff delay on all countries bar China).

This may coincide with increased noise from politicians and businesses, as well as heightened pressure on the administration to change course, from individuals experiencing dramatic losses in their 401k retirement accounts.

Some Better News

From an investment building blocks perspective (Macro, Sentiment, Technical, Valuation), the ferocity of the sell-off over the past trading week has led to some proverbial ‘green shoots’ appearing. We are not suggesting an important low is ‘in’, but, like a rubber band that has been fully extended, a short, sharp snap-back in the opposite direction, in this case to the upside, becomes a growing possibility.

Macro: last week’s US employment and housing data were both robust releases, and far ahead of consensus estimates, but completely ignored. If America can side-step a recession in 2025, odds of positive equity return twelve months out from here greatly improve.

Valuation: Whilst it cannot be argued that US markets are cheap, many international markets have returned to attractive prices in an absolute and relative context. The sharp move higher in fixed income investment grade and high yield corporate spreads (the additional yield compensation demanded by investors owning ‘riskier’ bonds over government bonds) has created attractive opportunities in credit selection.

Sentiment, as measured by the CNN Greed and Fear gauge is at multi decade lows (a ‘4’ reading currently), whilst the VIX, or volatility index (Wall Street’s widely used barometer of fear), touched the 60 level today, the 5th highest reading in the history of a series that extends back to 1993. Both measures point to indiscriminate investor selling at any price.

Technical: Retail inverse (short) ETF buying as a percentage of overall ETF buying has hit the ‘50’ level, suggesting ‘dumb money’ is screaming to buy house insurance after the family home has caught fire. From a contrarian perspective, we are approaching an area close to what we would consider short-term capitulation, which again, points to greatly improved odds of positive equity return twelve months out from here.

What Have We Done for Our Clients?

Opportunistically, we meaningfully dialled down equity risk exposure for our more conservative and balanced strategies in January and February, whilst shifting some American equity exposure to more unloved regions for our growth and equity risk strategies. Within the US, the equal-weight large-cap S&P 500 index has materially outperformed the cap-weighted S&P 500 growth index and the technology-laden Nasdaq index, both of which are suffering a rapid repricing to the downside.

Within bonds, we have been strategically underweight long duration bonds against the backdrop of mounting government deficits and a wall of supply this year that could create refinancing problems for weaker companies. Our preference in the space remains high quality investment grade corporate credits and financial hybrid bonds issued by well capitalised European banks and insurance companies.

Gold continues to shine, breaking through and holding the psychologically important three thousand dollars per ounce level. The barbarous relic, as it is known by investors unconvinced by its allure, has now outperformed the S&P index by 2.5 times since the year 2000. We continue to hold meaningful gold allocations for our range of multi asset strategies and anticipate adding to our precious metals mining exposure throughout the remainder of 2025.

Conclusion

TEAM’s framework and process suggest that we are not through the woods yet in terms of the current bear market unwind. Whilst it may be cold comfort for clients, we are a lot closer to a meaningful low for markets than this time last week, and we have, thus far, managed to restrain portfolio volatility and draw down losses within the tramline guidelines of each of our mandates.

We anticipate better opportunities ahead to lean back into risk assets in meaningful size in the coming weeks and will communicate strategy changes with you accordingly.

As always, your ongoing support is much appreciated.

(Cover Image Source: Kristina Volgenau)