Market Update: Make America Wealthy Again, but mind the penguins – from Jilly Mann

Posted by melaniebond

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As I’m sure you are all aware, President Trump has thrown what was already a fragile world into disarray in recent weeks. Simply trying to keep up with the about turns in his tariff policy has been a job in itself. Whilst we currently have something of a pause in his sledgehammer approach, this update provides our views on what has been going on, alongside the actions we are taking within portfolios to cope with this shift in global trade. In this update, we will cover the following:

• Liberation Day: about tariffs or about China?
• Echoes of Brexit
• Impact on inflation and interest rates
• Why this market event and our response to it is different this time
• Once in a lifetime – or a cat with nine lives
• Globalisation and a new world order
• Alternative solutions for our portfolios with reduced charges
• Conclusion

Liberation Day: about tariffs or about China?

Whilst President Trump sent a metaphoric bazooka through global markets with his widespread tariff announcements, the reality is that tensions with China lie at the heart of his economic policy. The tit for tat we have seen over the last week between China and the US is the policy Donald Trump really cares about.

The now notorious tariff board which he exhibited on Liberation Day, April 2^nd 2025, when the initial wave of tariff changes were announced, invited ridicule from many sources. The US have felt for many decades that there is a global trade imbalance and previous Presidential incumbents have all expressed frustration at an increasing reliance on the US as a trade partner. Despite their public misgivings, Presidents have continued to preside over deals which were increasingly weighted in favour of the other side. What that means is that the other side imposes a trade tariff on the import of US goods, which far exceeds the tariff which the US applies in return. Donald Trump is simply the first President to actually take action to reverse this trend.

The manner in which he has done this doesn’t sit well with most people, but the rationale behind it is understandable and is popular amongst those who voted for him. Popular that is until they start to feel the effects from rising inflation and a shortage of stock.

What makes the present situation so volatile for markets is the lack of coherence in that initial announcement where he presented the tariff board. Had Trump targeted specific industry and sectors, I think that markets would have accepted the outcome far easier, albeit the levels of tariff would still have caused ructions. By Trump simply targeting whole countries, markets are left with an incoherent strategy, one that is largely unworkable, and which will inevitably need rolling back from in order to reach a sensible solution.

We have already seen some of that rolling back in action, as Trump has provided a 90 day cessation period before the tariff board rates come into effect. This is proving to be something of a pattern. When he previously announced wide ranging tariffs on Canada and Mexico, he swiftly after offered them a cessation period as well. Markets don’t like uncertainty and will initially react to the broadbrush effect of such announcements, but given his track record, thoughts then quickly move to second guessing which tariffs will stay in place and which will be paused or watered down.

By targeting whole countries rather than sectors, we ended up with the slightly crazy situation of penguins paying tariffs. The US attempted to explain this away by suggesting that they were pre-empting a re-routing of trade via penguin-only inhabited territories (the Heard and McDonald Islands), but it did little to counter suggestions that the whole tariff board was a product of AI rather than drawn up by Government Officials.

Ironically, this led to analysis that AI is one sector that will be severely impacted by the tariffs remaining in place. Whilst Trump’s objective to “Make America Wealthy Again” is understandable, the US simply doesn’t have the infrastructure or minerals to replace certain goods which have to be imported. Translated, this means that taxing Lesotho at 50% on imports is a great soundbite for the US people, but if the goods being imported are diamonds, which the US simply cannot produce themselves, then the people suffering are US consumers. That isn’t making America wealthy again.

The understated announcement last weekend that tariffs were cancelled on the import of iPhones and iPads is a further acknowledgement that the US needs these goods to be imported, and a lack of supply will quickly impact the US consumer and business. The cancelling of this tariff meant that the top import to the US from China, no longer has a 125% tariff applying to it.

Nvidia, the darling of the Magnificent 7 (the 7 largest stocks in the US) over the past couple of years, has just issued a warning that if the Chinese tariffs remain in place, they will face an increase in costs of £4.2bn to export its most popular H20 AI chip to the Chinese market, as the US Government now requires Nvidia to have a licence in order to trade to China. These examples will keep emerging and whilst an element of market fatigue will kick in at some point, for now, the pointing out of the obvious by huge US corporates will continue and investors will be waiting for Trump’s response. Will he backtrack and issue an exemption to keep Nvidia happy, or will he ride this one out?

The previous chart demonstrates how significant the Chinese trade deficit with the USA is compared to the next largest deficit, i.e. the EU.

To sum up, in my view, Liberation Day symbolised Trump’s war on China, but longer term will likely come to represent Trump’s war on China, as long as it doesn’t impact the US consumer too badly.

Echoes of Brexit

A knock on effect of the new world order for trade tariffs, will be slowing supply chains and reduced inventories. Businesses simply will wind down stock reserves and won’t look to carry so much surplus knowing that tariff hikes are likely to hit future sales and purchases. This will in turn impact employment rates as less goods will be produced, and will likely lead to reduced workforces.

The more I consider the US position on tariffs and increased protectionism, the more it feels like the US version of Brexit. An entirely self-imposed position that may prove beneficial in the longer term, but in the short term hasn’t been provisioned for and will lead to market uncertainty in the near term.

If we take the UK as an example, we weren’t and still aren’t ready for the changing employment dynamics arising from Brexit. We don’t have all of the applicants for jobs, particularly manual labour, that we need to successfully cope without a ready flow of candidates from Europe. The US is in a similar position. Whilst the ideal is protectionism, made in America by Americans, they simply don’t have the numbers to work in the factories even if they built them, which in itself would take years.

That situation may change in the years ahead, but it will take time and in the short term, inflation will likely come back into play as they don’t have the domestic inventory available to trade away from foreign entities. The tariffs then have to be paid, price rises have to be passed onto consumers, inflation returns, ultimately leading to job losses. The cost of goods to build said factories is also then unaffordable and uncompetitive. This isn’t the version of events that Trump’s administration will regale, but it is something which markets worry about.

Impact on inflation and interest rates

In terms of inflation, much comment was made in the immediate aftermath of the tariff announcements suggesting that the US will need to cut interest rates and that they remained set for 4 interest rate cuts this year. Unfortunately, I’m not so sure that the Federal Reserve will simply press on.

It is no secret that Trump and Jerome Powell, the Chair of the US Federal Reserve, don’t get along. If Powell has been safety first and almost too reluctant to act in reducing rates historically, he is faced with his nemesis in Trump, who is quite happy to ride roughshod over the usual political protocol. My expectation is that the Federal Reserve will hold interest rates at their current level in the immediate term. The announcements coming from the White House are so frequent, wide-ranging, sometimes contradictory, seemingly ill thought through and economically challenging, that for the Federal Reserve to simply press on regardless in an atmosphere of chaos feels incongruous.

As I said at the start, the need and desire for the US to re-write the tariff rules in my view is not unwarranted. However, the manner in which they have gone about this was maybe deemed necessary in the US to make sufficient impact. Perhaps the hope is that even with concessions ultimately made, the US ends up in a far better trade position than it was before. Normal trade negotiations are years in the making. During Trump’s first stint as President, he did reduce the imbalance with China and reduced trade with them, but this time, he clearly wants to finish what he started. Amongst the US population, if he can achieve progress, it will be hugely popular, the challenge Trump now faces though is saving face whilst he negotiates with countries and settles the markets. Whether a 90-day hiatus will suffice for all of those negotiations is doubtful and so we can expect some further market movements as we approach the 90-day deadline.

We don’t believe that it was movement in global equity markets which actually prompted Trump to offer a 90-day hiatus, it was the bond market which spooked him. We have covered this in previous updates, but the usual relationship between bonds and equities is that if equities fall, then bond prices rise. If equities rise, then bond prices fall. What happened post Liberation Day was that both equities and bonds fell.

The US 10-year Treasury is often cited as a bellwether for the health of the US bond market. Post Liberation Day, US Treasury yields rose over 0.5% in one week at the peak of uncertainty. To provide context for that, if equities fall, bond prices should rise, and bond yields should fall. Liberation Day caused such consternation on the markets that the disconnect in the bond market could have been hugely damaging to the US consumer and the US financial system had something not happened to stem the tide, and it was this that effectively forced Trump to row back by putting in place a 90-day pause.

Why this market event and our response to it is different this time

The last few weeks have led to questions as to why we haven’t sold out of equity and bought more bonds as we have done in previous market events, such as the Covid pandemic and the Global Financial Crisis of 2008. The reason is that this market event is different. Liberation Day was entirely self-inflicted. It was, and still is, unpredictable. There were few signs that the breadth of the announcement would be as extensive as it was and as we have seen, it can be reversed as quickly as it was introduced.

The pandemic took effect at great pace, but it was an event with identifiable winners and losers. The Global Financial Crisis of 2008 was the same. When it reached its peak, the impact was brutally fast, but again the cause of the Crisis meant it was easier to identify winners and losers. When an event is self-inflicted, the market is to some extent at the whim of the protagonist and so turning hugely to bonds would not have achieved the same positive outcome as we saw in previous crises.

In some respects, it is similar to the Ukraine/Russia conflict. Ultimately the longevity or brevity of that conflict is in the hands of a few individuals rather than any external forces. Trump started his second term as President pronouncing that he was the peacemaker and would end the war. We saw some fairly unpleasant engagements between Trump and President Zelensky as he applied his gruff approach to appeasement, yet ultimately Trump is not the man who will decide when the war ends. Putin will ultimately decide when the war in Europe ends.

Leaving aside the war in Ukraine, we recently spoke to manager of the Schroder US Mid Cap fund manager, Bob Kayner. He explained that, in his portfolio the top 20% of stocks were down 23%, but the bottom 20% of stocks were down 30%. That is a 7% difference between the best and the worst, a marginal difference in the context of the extensive falls we have seen. That indicates an indiscriminate selloff impacting all sectors and industries. Whilst individual stock winners and losers are yet to emerge, some sectors can already be identified as being structurally challenged longer term. The vast majority of US apparel companies will be hit with the Chinese tariffs and so it is hard to see an easy recovery in some areas.

We have remained invested in Bob’s fund, and this has been a further example of the adage that being out of the market, means missing out on some of the best days. The charts below demonstrate on the left that 50% of the best days on the S&P 500 have happened during a bear market, not a bull market. The chart on the right shows the difference in return for investors who remained fully invested in the S&P 500 on the left-hand bar, across to missing the best 30 days of returns on the right, smaller bar. Whilst we aren’t fully investing in the S&P 500, the data gives an indication as to the impact of attempting to market time in conditions such as we are in now.

 

It was perhaps a little incredulous of Trump to seek plaudits for the US market rising almost 10% on the day that the 90 day tariff concession was announced, given the much greater losses he had brought about with the manner of Liberation Day, but we have increasingly seen that market events are shorter, sharper and quicker to reverse than was the case decades ago.

Once in a lifetime – or a cat with nine lives

I feel like a broken record sometimes bemoaning the numerous “once in a lifetime” market events we have experienced over the last 20 years, but I think this is the new normal. Technology is such these days, that news flow is faster, opinion is everywhere and as fast as opinion detracts, it reverses just as quickly. The pace of everything has picked up.

This isn’t even down to the algorithms which I have often cited as being behind the continued surging of the US stock market in the last few years. The algorithms being the computer driven targets which are set to automatically buy and sell stocks at certain prices. This has the effect of inflating prices for stocks that based on traditional metrics cannot support those elevated prices. In this instance, hedge funds have sold out of much of the market and so the algorithm link has largely been broken in this selloff. This is just further evidence that Liberation Day was a unique event.

Globalisation and a new world order

It feels regretful that 80 years after the end of World War II, much of the unity, globalisation and peace which we have enjoyed in the years since, seems to be unravelling at pace. The message isn’t all doom and gloom, new trade agreements that offer compromise and benefit on both sides can likely be achieved between many global partners. US protectionism in itself isn’t destructive, from a US perspective it clearly offers upside, but the US antagonising or indeed bullying its trade partners and traditional allies is less edifying.

The chart above shows the impact of the proposed tariffs which Trump has announced compared to the last 100 years or so, if they all proceed at the proposed Liberation Day levels. The result will be that tariffs will be higher than at any time since the Wall Street Crash in 1929.

Some of the trade partners which the US has targeted for the highest tariffs are those countries who are emerging economies. Their infrastructure hangs together on a thread, and they simply can’t afford to trade with the US on inflated tariffs. The knock-on consequence for the people living in those countries could be huge. That isn’t just a cross for the USA to bear (to use a timely idiom) and so what we may well see happen in coming months are improved trade relations between the world minus the USA. China is already on a charm offensive in South East Asia, and although the UK will largely be unscathed as a result of the US tariffs, like the penguins we are only facing 10% tariffs, but we may see opportunities to build stronger trade agreements with those countries who the US are targeting the most.

By targeting countries such as Vietnam and India, the US is perhaps pre-empting a re-routing of trade from China via other Asian countries, there may be opportunities for other countries to fill the US void. In every crisis, there is opportunity, the difficulty in this situation is that with almost hourly revisions to US policy, making bold moves in portfolio selection is fraught with danger.

Alternative solutions for our portfolios with reduced charges

That is not to say that we are simply ignoring what is going on globally. As an example, we are concerned for the stability of bond markets whilst the tariff announcements undermine market confidence and so we are looking at other ways of reducing risk in portfolios aside from fixed income.

Alternative strategies such as absolute return funds and increased commodity exposure are ways that we can look to do this. We have held absolute return funds in the past, I recall us doing so in 2008/09 when the Global Financial Crisis was taking effect, but we have always been very cautious about the type of funds we own in this space. We are looking at ‘vanilla’, predictable types of funds that aim to produce positive returns in all market conditions. These funds aren’t doing anything elaborate or complex, but in current market conditions they do offer a differential to equities and bonds.

We have mentioned before about our increasing collaboration with Square Mile and one of the benefits of this collaboration for investors lie in economies of scale for fund pricing. A fund we are looking to introduce is the Titan Square Mile Alternative Strategies fund. This fund comprises 5 underlying funds managed by external fund managers such as Janus Henderson and Monument, all with exposure to commodity/absolute return type strategies. A multi-managed approach for want of a better phrase. The rationale behind the fund is simply to allow us to purchase these funds within one structure, for a lower overall cost than if we bought them individually, whilst retaining full transparency over the underlying holdings.

This model is something that Square Mile are looking to introduce in other asset classes as well. For example, their International Fixed Interest version contains a number of the fixed interest funds which we currently own in our portfolio already, but potentially we now have the ability to continue to own these funds, but at a reduced cost, thanks to the scale of the Titan Wealth group of companies.

This can only be a positive for investors who benefit from additional investment research capability, a consistency of fund selection and lower overall charges. One of the reasons why we wanted to collaborate with Square Mile was because they viewed the world and portfolio management in a very similar vein to us, which hopefully provides a seamless integration for our clients.

The Square Mile multi manager funds, such as those I have highlighted above, are different to the Titan Equity Growth fund which we also own in portfolios. The Titan Equity Growth fund is an equity fund which Titan manage themselves in house, but the reason we own this fund is because the strategy has been running for a number of years, pre-Titan, and warrants a place within our equity exposure in its own right.

Conclusion

To conclude, it would be foolish at this stage to attempt to predict market movements on a daily basis for the coming weeks. We are very much in market conditions where remaining calm and staying invested should be the long-term winner. Our portfolios are diversified and have been deliberately underweight in the US in recent years. We see particular growth opportunities in Europe and parts of Asia. We haven’t focused on the UK in this update, and we continue to feel that the UK faces its own specific set of challenges, but there will still be opportunities to profit from a rebalancing of global trade relations away from the US.

Hanging our hat on one particular market or asset class doesn’t feel the right thing to do in these conditions, as that will inevitably lead to us missing out on returns when markets rise. We can expect markets to remain nervy for the coming weeks and we will start to see the winners and losers emerge, but in Trump we need to expect the unexpected. Beneath the bluster, there is a rationale behind what he is doing. We don’t have to like the way he does it, but he won’t break the system. He does have limits, he will backtrack, he will want to feel like the victor and who knows, he may yet reach the promised land where he Makes America Wealthy Again, whilst the rest of the world emerges from the shadow of the world’s largest economy, thriving in absentia.