NEWS + VIEWS – 09/04/2025
MARKETS
The Trump Administration’s decision to impose significant tariffs across trading partners has put share markets into a tailspin. The size of the tariffs announced (average of 20% compared to expectations of around 10%) caused the severity of the sell-off.
So far, the ASX 200 is down 12% since its February highs and the S&P 500 down 19%, building in a higher chance of a recession in the US with analysts predicting a 50-60% probability.
What could make the market turn? Possibly a partial winding back of the tariffs on the back of negotiations? There must be significant pressure from within the Republican Party as political support rapidly fades, which would become enormous as prices of goods jump.
Since consumers, companies and investors hate uncertainty, markets are likely to stay volatile for a few months until some sort of ‘order’ emerges.
Eventually shares will present irresistible value to institutional investors and a market rebound will begin in earnest. Markets are forward looking and do not wait for the end of a recession before rebounding nor even for interest rates to bottom.
According to KKR, there is some possible ‘good news’ in the US that may assist a market turn.
Tariffs on Canadian and Mexican goods not under the US, Mexico and Canada free trade agreement could drop from 25% to 12% if the flow of drugs across US borders is curbed, which suggests that there may be some other negotiable positions.
Some of the $700 billion from tariffs could be distributed towards fiscal easing elsewhere.
Tariffs may be legally challengeable in the US although this wouldn’t remove short term uncertainty.
The most cyclical areas of the economy such as construction spending remain well below trend and not excessive. Debt across businesses and individuals is below 2019 levels.
There is more than $6 trillion sitting on the sidelines waiting to be invested. While IPOs, Leveraged Loans, and High Yield are tracking above 2009 levels, they are nowhere near 2006 or 2021 levels. Banks are largely de-levered.
Negotiating could begin soon. If one major country can negotiate a reasonable position, it could reduce anxiety. Establishing agreed positions in key countries like India and Japan would be significant.
THE IMPORTANCE OF STAYING INVESTED
Market volatility is nothing new. Consider some of the events that have shaken markets such as the dot.com bubble burst in 2000, the Global Financial Crisis in 2008 and the outbreak of COVID-19 in 2020. Each grabbed the headlines, but ultimately markets recovered.
Volatility is a normal part of investing. Trying to time the market means getting two important decisions right: when to get out and when to get back in. Get either wrong, and there is a risk of having to pay a higher price to re-enter the market as well as missing out on the growth from the market recovery.
The chart below maps the size and duration of bear markets and subsequent bull markets. Over the 43-year period, there were around 38 bull years and less than five bear years with a bull period lasting an average of 6.4 years and a bear period lasting less than a year.
Source: Collins House
Markets recover strongly from bear markets. In a bear market, share prices ‘go down in the elevator and up on the escalator’. That is, the down moves are very fast whereas the bull market recoveries take time.
Identifying when the turn is occurring is the hardest part. Also, the gains in share markets while they may be spaced apart, happen within relatively few ‘up’ days. Missing those up days has a big impact on longer term returns. Thus, the saying ‘Time in the market, not timing the market’ is important.
We have been through major share market downturns before, and all of course are unpleasant. Further volatility is likely particularly if financial indicators start flashing recession. However, history tells us that markets rebound.
Owning strong companies, diversification and spreading investments across various asset classes (asset allocation) reduces risk and offers stability in a portfolio. The interest-bearing component of a portfolio provides some protection from market falls, and dividends and interest are paid while waiting for a recovery in share prices.
Gerard O’Shaughnessy
P 0423 771 330
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