In each of the last two months, we claused our positivity:
“we cannot eliminate the potential for stupidity from Donald Trump,
so remain on our guard”
His stupidity has scaled new, and dangerous, heights, having blown up the global trading infrastructure which has evolved since the 1940s.
Listening to Trump on Wednesday 2nd April, someone called it “cowboy economics”, but that is deeply offensive to cowboys. Here is a selection of the more sober headlines from the following 48 hours:
World reels – America’s astonishing act of self harm – US pathology is unleashed upon the world – The risk is that the virtuous circle will turn vicious and upend the US financial system – Flawed economics, inaccurate history and cockamamie calculations – The most wrong-headed and damaging policy decision in decades – Mindless tariffs will cause economic havoc.
The uncertainty is extreme, and without precedent. As Bloomberg’s John Authers put it:
“It’s hard to see how things get significantly better without getting much worse first”
It is now a decent working assumption that the US stock market bubble has now been pricked. Yet, if so, it is early days in the unfolding downtrend. The eventual bottom will be evidenced by despair and panic, and we are nowhere near to that as the embers of the investor mania still burn bright.
For example, on Friday 4th April, an ETF tracking tech stocks was one of the most traded features on the Fidelity’s US platform, and buyers outpaced sellers by 3-to-1. In itself that isn’t the most extreme behaviour… until you realise that it had just fallen about 50% in three days, and was 3 times geared to moves in these stocks e.g. if they fall 10%, the ETF falls 30%, and vice versa.
When markets hit bottom, these investors will be wiped out. That is probably some time off, as a bear market worthy of the name in the main US stock market, S&P 500, will very possibly stretch into 2026, as a minimum.
Retaliation was expected as Trump went to war with the rest of the world, and China hit back on Friday with their own equivalent tariffs (taxes) on US imports. Even before this news a number of investment banks were moving the odds of recession to 50% (a recession which would be global in nature), and this now looks more likely after that news from China.
The EU will be next, and they must now step out from behind China. Will they retreat to warm words or hit hard? What is the best way to deal with the bully in the playground? Everyone act together?
Better still, a cooler head might emerge and provide global leadership, and turn Trump away from his absurd tariff policies, without making him feel the idiot he is.
Right now the latter feels like the least likely outcome, so the former, an accelerating trade war, is probably the path of least resistance. If so, the US market will continue tumbling. Regular readers know that we have regularly anticipated this – the vulnerability to extreme falls was absolutely clear, only the timing and trigger were unknown.
From those previous regular missives, you know about the extreme US valuation. You also know about the investor mania, particularly the over-excited and complacent investors e.g. borrowing record sums to throw at the S&P 500. Lastly, if the US bubble is now well and truly bursting, you know that history informs us to expect falls in excess of 50%.
Tesla is an interesting case study. Their share price fall is already stretching towards 50%, but the downside remains considerable.
Musk might be Trump’s “First Buddy” and the world’s richest man, but rumours abound of Musk’s removal from DOGE and Trump’s inner circle. Assuming Musk knew in advance of the China tariffs to be announced last Wednesday evening by Trump, he would have been extremely unhappy.
Although Tesla car sales have collapsed in Europe, in China, perhaps surprisingly, they have held up… so far. Are you old enough to remember the “Buy British” campaign of the 1980’s? Or the 1960’s slogan “I’m Backing Britain”?
Don’t be surprised if the Chinese authorities act to encourage this kind of patriotic consumerism. Tesla would be screwed.
You might think it couldn’t get worse for Tesla shares. Yet its stock market value is still more than 4 times that of their big Chinese competitor BYD. The latter is rapidly gaining market share, the former is losing it. One relies on a wobbly cult following, the other makes decent cars, which are getting better. In the first quarter BYD became the world’s larger seller of electric vehicles. Hmmm.
As trust in the US continues to deflate, selling of the S&P 500 will persist. Geared investors, if they have any sense, will be first to head for the exit. US based institution dare not be seen publicly to sell for fear of a Trump tribe backlash, but they will find ways to do so. The foreign investors holding the S&P 500 are an interesting bunch. Full of enthusiasm, buoyed by the idea of America exceptionalism, largely oblivious to the considerable valuation risk, let alone political risk, they piled in.
For example, European investors hold about 17% of the value of the US stock market according to the FT. That’s not far off the value of all European stock markets combined. Now the problem is not so much that European investors are horribly over-exposed to the US, rather that the US stock market is very sensitive to the whim of European investors, who are increasingly nervous.
Gold is holding steady. Some government bonds have improved, with rising expectations of interest rate cuts, in the UK and beyond. And governments and central banks will announce supportive measures in the days ahead, to try and head off the worst impact of Trump’s tariffs. As the latter unfold we will be looking carefully for opportunities, as many world markets are already decent value (excluding the US).
*If you are already on our Discretionary Fund Management (DFM) service, we are taking care of the important investment decisions relating to these market changes.
**If you are not using our DFM service, your adviser will be in touch if they think action is required on your portfolio. If you are particularly concerned, please contact your adviser sooner rather than later.
