A recovery, but no chickens counted here

The past week has seen a significant recovery in stock markets, led by the United States.

This builds on an improving trend that has been in place since 9 April when US President Donald Trump began to gradually back away from tariffs in the face of pressure from the bond market in particular.

This week, however, markets rallied on news that tariffs between China and the US would be reduced. China cut tariffs on US imports to 10%, and the US set tariffs on Chinese imports at 30%. These tariffs serve as a baseline for 90 days while negotiations continue.

This news was further supported by lower-than-anticipated US inflation that contributed to a significant move by investors back into US shares as fears of a recession abated.

There is still weak data to be found indicating anxiety about the economy amongst consumers and businesses, but the actual earnings delivered by companies this season have been strong. 

This news is all to be welcomed and supports our basic thesis, which we have maintained in recent months, that whilst US tariff policy undoubtedly pushes down on global economic growth, some forces will act against it. This includes domestic political opposition to the growth-suppressing policy, legal challenges, and the resistance of the bond market. President Trump may project an all-powerful image, but he exists within a strong institutional framework that acts to restrain him. When his policies sent money fleeing from the United States, driving down the dollar, even as the cost of US government borrowing rose, it was clear that even the president would have to take heed. 

For this reason, we have resisted reducing risk during this period and have held firm to our current holdings, with some marginal increases in the diversification of our equities within the funds we use within portfolios to make tactical shifts. It is gratifying that this bounce has validated that decision.

However, this is no time for unreasonable optimism. While these tariffs have been reduced, they are still significant, and the reduction lasts for just 90 days while broader negotiations continue. There is ample opportunity for error from policymakers, and this is amplified by the unpredictability of President Trump himself.

We believe that whilst conditions have somewhat improved, the year ahead is still best tackled by maintaining a very broad exposure to equities across the world with an emphasis on higher-quality shares that can be protective during periods of softer economic data.

Nonetheless, we are pleased that client portfolios are recovering from the turbulence earlier this spring and remain focused on ensuring that they retain good participation in the recovery. 

When crises hit, they always seem new, unexpected, and shocking. They cause us to worry whether markets can ever recover. This is the essence of shocks; they are, to offer a truism, unexpected. Yet in another sense, there is nothing new under the sun. Whilst investors had no ready-made plan for President Trump's tariffs, we do understand that the economic and market consequences they produce follow a pattern that is really no different from many other growth shocks. We understand that whatever the cause of the shock, it is staying calm, keeping our nerve, and preserving broad diversification in highly liquid assets that can see us through in the end.