This is not the first draft, but probably the fourth at this point. When we started writing on Wednesday about the recent market sell off, the Nasdaq 100 (the main US tech index) was down 12% in April already. The message was threefold: we’re resisting the urge to make any changes, the selloff had been overdone, and fundamentals will prevail. Whilst Tuesday saw one of the biggest rug-pulls in history (first time the S&P 500 has ever opened 2% up and finished more than 1% down)1, Wednesday saw the strongest 1-day rally since 2008 for the S&P 500 (+9.5%) and since 2001 for the Nasdaq (+12.0%)2.
Why we’re not making changes (just yet)
Time in the market is king. The best days happen in bad markets and if you missed the S&P’s 10 best days over the past 30 years, your returns would have been cut in half. Missing the best 30 days would have reduced your returns by 83%. Not only that, but corrections also make for good buying opportunities. The below chart shows that when the S&P has sold off by 10% or more, even with a recession, the market is up on average over 3, 6 and 12 months. Without a recession, the market is up on average almost 10% within 6 months.
We sat on our hands this week and it paid off for our clients.
Source: Goldman Sachs Global Investment Research
Why the selloff has been overdone
The other reason we haven’t made any changes this week is that we believe the indiscriminate global sell off has been overdone. Take the UK for example; the main UK stock market has sold off twice as much as the US stock market over the last month, despite the tariffs significantly impacting the US economy more than the UK. The 10% tariff on £6- billion of UK exports is a £6 billion hit to the UK. To put that in perspective, the current government spend £3.5 billion per day. The tariff hit to the UK is expected to have a 0.1% impact on GDP, which you could almost put down as a rounding error3. UK consumer balance sheets remain strong and, if we were optimistic on the UK before, we think it’s now in the same position just on a discount.
Deal or no deal
The Trump administration was clearly surprised by the market’s reaction to the tariffs, blinded by their misguided belief that they would generate revenue for the government at the expense of foreign nations, not their own consumers. This was evidenced by Trump’s posts on TruthSocial urging followers to ‘BE COOL’ and then the instant reversal on Liberation Day with the 90-day pause on tariffs. The Trump administration clearly want to reduce the trade deficit, which is why you have a direct correlation between the trade deficit and the imposed tariff rate, however, they’re beginning to realise that the protectionist, domestic manufacturing dream is more difficult than they thought. You can’t just build new aerospace manufacturing plants in the US that require 3 years to get approval and then also train a new workforce. Equally, you can’t move textile manufacturing to the US where labour costs are far higher, without driving prices through the roof. Even the MAGA hats are made in China.
Tariffs hit the US economy the hardest as they act as a tax on US consumers through higher prices. The fear of this has decimated consumer confidence in the US which will negatively affect both consumer spending and corporate investing. A lot of parallels can be drawn to Brexit, where the US is creating trade barriers for itself. this is having a similar effect in weakening its currency and the policy uncertainty is likely to trigger outflows from the US, just as it did to the UK.
Conclusion
The indiscriminate sell-off has created a lot of opportunities; we’re looking at China, India, the UK and Europe as areas that we believe are now fundamentally mispriced. As central banks continue to ease rates in these regions at a faster pace than the Fed and corporate earnings demonstrate their resilience in light of tariffs, we see the discount they trade on vs the US narrowing. We held on to the US through the recent rebound, but headwinds remain, and we may look at bringing in further protection, capping the upside to mitigate any further downside. If you would like to discuss the above in further detail, please do reach out to your dedicated Investment Manager.
Other Sources:
1 Saqib Ahmed, Reuters & LSEG
2 Wall Street Journal: Nasdaq Soars to Best Day Since 2001 After Trump Pauses Some Tariffs.
3 Artemis UK Select March Update
The value of your investments can go down as well as up, so you could get back less than you invested. Past performance is not a guide to future performance.