Start of 2025 has been very eventful with Trump grabbing headlines virtually everyday and driving market volatility up. The uncertainty caused by Trump’s rhetoric around tariffs, immigration and establishment of DOGE (Department of Government Efficiency), who have culled several thousand federal employees across various departments, has caused significant market stress. Markets have now corrected from their recent highs.
Consumer confidence has faltered with concerns around cost pressures (which increased tariffs will likely bring), inflation concerns, and job security being front of mind.
This uncertainty drives a ‘wait and see’ approach by both consumers and businesses alike and potentially could hold back both spending and investment. The consumer is vital to the US economy and drives about two-thirds of economic activity by expenditure.
The persistent political change around the globe, the tariff ‘tit-for-tat’, the Russia-Ukraine and the Middle East conflict is driving significant volatility in equity markets and tactical re-pricing of assets. What the longer-term consequences of these political ideologies will be is yet to be seen. However, volatility will remain high in our view and perhaps throws a bit of caution into the wind.
Interestingly, US company profits have been high as the elevated covid pricing has remained. Investors are optimistic on tax cuts later in the year as promised by Trump. There has been enormous spend on AI in the US and abroad. Employment around the Globe remains at all-time highs. There has been a change in strategy as companies have spent big on new and tangible projects (AI focused largely) instead of paying dividends and doing buy backs. This could spur growth and could provide new opportunities.
Markets sold off globally (driven by the US) last month driven by concerns around inflation, tariffs, and valuations. This was further exacerbated by DeepSeek out of China that proclaimed to develop AI for a fraction of the cost of what the likes of Google, Amazon, etc. had spent. Whist the numbers from DeepSeek are highly questionable, the Magnificent 7 have retreated lately in terms of share price but have reiterated guidance that they will continue to spend big on AI.
We attended the Blackrock Summit last week and also had the privilege of hearing the Global Chief Economist for Vanguard, Joseph Davis present during his visit to Sydney a couple of weeks ago. Both had a very positive view of equity markets for the foreseeable future. This is not to say that market will not have wobbles along the way, but the journey they predict will be onwards and upwards. The consensus view is that AI will eventually be mainstream and enhance productivity across many industries whilst, to date, it has not had a material impact. He believes that we are in the midst of a valuation-supporting productivity boom due to AI. He also shared some lessons from history where, in the US back in 1920, tariffs were increased four-fold across the board and immigration reduced by 80%. Yet, the ensuing decade was one of stellar growth due to electrification of homes, factories, etc. generating significant productivity growth. Joseph likens AI to electricity for this era of growth and remains positive for equity market returns.
Vanguard forecasts GDP growth of 2.1% in the US, reflecting the negative effect from Trump policies on trade and immigration, not to mention tariffs wars but hopefully equally reflecting an easing monetary policy.
We are also hopeful that common sense will ultimately prevail and all the ‘noise’ that Trump revels in will soften and trade deals will be done that will lessen the negative impact on global growth. Our base case is for a positive, albeit volatile, equity market for the next 12 or so months.
Lastly, here is a chart that illustrates the value of remaining invested and true to one’s investment strategy and longer-term, strategic asset allocation. It shows that after a share market shock, a 60/40 (growth versus defensive) portfolio beats cash 75% of the time by an average of 7% after 1 year, and 100% of the time by an average of 21% after 3 years.
Therefore, turn down (ideally turn off) the noise and understand that investing is a long game, especially when done sensibly.