May monthly investment update - Reflections on April 2025 and a look ahead

On 'Liberation Day' at the beginning of April, Donald Trump's Rose Garden announcement (whereby he laid out his reciprocal trade tariff plans), set the tone for a roller coaster month. A month which, somewhat surprisingly, ended up far better than could have been expected, following some very sharp initial falls in financial markets.

The US President had been clear during last year's election campaigning that trade tariffs were coming, but the size and scope still caught most investors by surprise, including ourselves, and the Chair of the US Federal Reserve, Jerome Powell. The announcement (late UK time) on 2 April, that baseline tariffs of 10% would be imposed on US imports from 5 April, plus some more specific additional tariffs a few days later, caused stock markets in the US to tumble and the US dollar to dive.

The big initial falls in US shares (of almost 5%) soon rippled out into other markets too, with a magnitude that was last seen during the 2020 Covid pandemic. The subtle difference this time though was the problem was clearly man-made and the work of just 'one' key individual.

Tariff news sends markets into a spin

Simple economics dictate that when there are many sellers in markets, and few buyers, then a price will fall rapidly. This is exactly what happened in early April - causing a big spike (higher) in market volatility. President Trump appeared to have completely misread how markets would react to news of his additional tariffs, as he’d predicted only 'a little disturbance' prior to the announcement.

When reality kicked in, the President pressed the 'pause' button for 90 days on those reciprocal tariffs - another unexpected move from him, but this one was welcomed. This immediately brought a sense of calm and a subsequent rapid recovery to global markets (which has still been maintained at the time of writing). During troubled times, investors traditionally flock to safe haven 'risk free' assets, which would normally include the US dollar and the US government bond market. Ironically, on this occasion, America finds itself at the epicentre.

China, at this time, found itself standing in the middle of the storm and chose to face the US head on. The Asian powerhouse currently faces substantially larger additional tariffs and (unlike many other countries) has chosen to retaliate aggressively with counter-taxes on US exports to China.

In terms of scale, average tariffs applied to goods entering the US in recent years have been almost unnoticeable (between 2-3%). By comparison, the initial US proposals announced on Liberation Day would have caused the average charge on US imports to be around 20%, perhaps even higher once reciprocal tariffs and sector tariffs (such as on cars, and potentially, medicines) are factored in.

During the 90-day pause, trade negotiations have been taking place across the globe. At the time of writing, there were no big tariff deals signed. Countries like India, Japan and, perhaps even, the UK could be towards the front of the line in terms of reaching some form of US-acceptable agreement on future trading terms.

The UK, of course, is infamously accustomed to trade negotiations - recalling the prolonged Brexit chapter and the Withdrawal Agreement (which set out how the UK left the European Union) - though the government has changed hands since that notable chapter of British history.

Prospects of slower world-wide economic growth

US trade tariffs are likely to cause slower economic growth for many countries for the foreseeable future, not least the US. However, the impact of tariffs is virtually impossible to quantify until substantive trade deals (not least with China) are signed and sealed. US inflation is also likely to be higher, in the short term at least, as trade tariffs push up prices for US (and global) consumers, for some of the reasons we have mentioned earlier.

How much damage is done to America’s reputation in the meantime is something else to monitor. We’ve talked before about the fading of ‘US exceptionalism’ in previous updates. Our thoughts are that other investors are now moving more towards Europe and/or Asia, and away from America - not least because the US stock market remains a much more expensive market.

The price of oil also fell heavily in April, which reflects something of a knee-jerk reaction to a potentially weaker global economy. If import tariffs are enforced, then the ensuing trade friction will act as a brake on economic growth and therefore lowers the demand for oil and energy. One silver lining is the dampening impact that lower oil prices could have on inflation, with lower oil-related product prices potentially offsetting some of the price increases we could see on imported products affected by trade tariffs.

With all the fervour that has happened during April centred around the actions of the US presidency, for one month at least, other newsworthy pieces fell to the wayside. For example, keenly anticipated inflation readings in Europe and the US were virtually ignored as historical price rise data for March felt somewhat out of date and redundant, for now at least.

Even the announcement of a dramatic 0.3% (annualised) contraction in the US economy for the first quarter (after growth of 2.4% was recorded for quarter four 2024) seemed irrelevant - admittedly due to the distortions caused by a giant jump in imports ahead of the expected imposition of tariffs. Imports growing faster than exports lowers the measure of economic growth.

Beyond the noise…

Normally, at this point in the year, we'd be talking about the first quarter reporting season (when companies update markets on their early 2025 progress), but this is a sideshow for the time being. Nonetheless, the prospect for future company performance is of paramount importance for long-term investors like ourselves. So, our internal research team will be keeping a close eye on corporate profit forecasts for both companies that we already invest in, and the ones we'd like to own in future.

Since his inauguration in January, we’ve seen President Trump spark an unprecedented global trade tariff war and create disruption amongst NATO allies. As the supposed leader of the 'free world', he’s also talked of taking Greenland as US territory, urging Canada to become the 51st state of America, and for the US to regain ownership of the Panama Canal.

It's certainly been an eventful first 100 days of Mr Trump's second term as US President!