It was good to focus on the UK last week, as I had a sneaky suspicion that this week would be all about the return of Donald Trump. As it does have a significant impact on your portfolio – please bear with me.
We were expecting a dramatic first day on Monday with confirmation of new tariffs on imports into the US. Markets seemed to like his initial view, though it is not clear how big a discount the market had already placed on Trump’s tough talk on tariffs. His administration knows markets do not like tariffs, and it wants markets to be happy. The relative calm, as is the way with Trump, lasted a few hours. On Monday evening, Trump told reporters he was “thinking of” putting 25 per cent tariffs on Canada and Mexico. “I think we’ll do it February 1,” he said. “I think” – really! His administration may have a plan but put a microphone in front of Trump and you never quite know what you are going to get. A comment to be taken at face value? Probably not. A negotiating ploy? Almost certainly. But for markets, strategic ambiguity cannot go on forever. Trump likes tariffs and tariff threats. Investors, on the whole, do not. This is a storyline that is not going to go away any time soon.
It is important to remember that Trump, and some of his key advisers, are focussed on what the markets do, and therefore I imagine he didn’t want this first week back in office to plunge the markets into negative territory. It appears, for now, that we are in a gradual negotiation period on tariffs. However, this could all change quite quickly.
At the end of the day, there is a “new” American president with an economic agenda that is long on radical ideas and short on specifics. We have just endured the first major inflationary incident in decades — and it may not be over yet. Stocks are at high valuations in the US and long-term bonds yields are volatile. The US Federal Reserve monetary policy rests on a razor’s edge. Uncertainty, is everywhere, and this is where active portfolio management tends to do well.
Interestingly, until this week the Magnificent Seven tech stocks have not had a great month. The big technology stocks have been underperforming since Christmas. The “Mag Seven” are such a huge part of the US stock market that a change in their fortunes amounts to a change in the character of the whole market. So, what is going on here? Any time we see a change in stock market dynamics, the first question to ask is whether a changing interest rate environment has something to do with it. Right now, that is an interesting question.
Higher rates reflect worries about inflationary pressures, and therefore tighter monetary policy, which in turn means slower growth. And in a slowing economy, investors want to own companies that do not depend on economic growth for revenue and profit gains, they simply are too big for competition to erode their profits. These are names everyone seems to want to have in their lives, no matter how expensive they are – for now. Think about Netflix, Google, Amazon, Microsoft etc.
The Big Tech companies fit the bill. The Mag Seven, in other words, have become a flight-to-safety trade. Reinforcing this interpretation, the sectors that have actually been outperforming while the Mag Seven have been underperforming, are cyclicals. Over the past month, the leading industries have been energy, materials, industrials, and financials. The prospect of a US economy that is boosted by Trump tax cuts and deregulation — but, crucially, is not suffering from inflation — is catnip for all four. Once again, inflation is a key metric to follow carefully, and that is exactly what is pre-occupying the central banks.
At some point, the time for posturing will end and the time for policy will begin. Trump will have to balance America becoming “a manufacturing nation again” against realising “massive amounts of money from tariffs;” the two aims suggest very different tariff regimes. It is standard to use the inaugural address to promise every citizen a tax cut, a lower deficit, and world peace. However, any hint about which of his many commitments Trump will pursue, and which he will neglect, will be seized upon by markets and commentators alike. This will not be a quiet few months. Do have a good weekend.
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