Paul's take on Trump, recession risk & markets

To state the obvious, we've just seen a crazy month on investment markets. The recent ups and downs on share markets globally are enough to bring on motion sickness, and it's all being driven by gyrations around tariffs coming out of the US. 

Sure, US President Trump made it clear that tariffs were on the agenda while he was on the campaign trail last year. 

What no one could have foreseen is exactly how tariffs would play out, especially the tit-for-tat retaliations and seemingly on-the-fly exemptions and tariff tweaks that have come out of the White House since Trump's so-called Liberation Day on 2 April. 

One thing is clear. All the uncertainty - and there's been plenty of it - has taken a toll on global share markets. And yet, in some respects, equity markets have proved surprisingly resilient.  

As I write on 23 April, the US S&P 500 is down 4.21% for the month to date.   

The UK's FTSE Index had dropped 7.5% between 2 April and mid-month. By 23 April, the losses had been cut to below 2%. 

Aussie shares have fared relatively well, gaining 0.98% for the month of April (to date) despite big falls earlier in the month. 

What's been truly astonishing is the sheer size of market falls - and subsequent rebounds.  

On 9 April for example, the US share market jumped almost 10% in a single day. The NASDAQ tech index gained over 12% in a matter of hours following Trump declaring a 90-day pause on tariffs for many countries.  

For investors, wearied by recent market movements, it can seem like the low-stress option would be to sell up share market investments and throw the cash into a savings account. 

Frankly, I'm not convinced that's a smart move. Here's my take on the latest market events.

The market may fall further... 

Unlike past market routs such as the global financial crisis, and the start of the COVID pandemic in 2020, the current market rollercoaster is being driven by announcements from the US President. 

The ad hoc nature of these announcements suggests decisions are being made 'on the go'. That means we are still in a high-risk environment though the situation - and share markets - seem to have calmed down, for the time being at least.  

That said, the possibility remains that we could be in for more bumps in the road before markets start to settle more permanently. 

...but history shows markets should recover 

It may be small consolation for today's investors, but the market volatility we have seen in recent weeks pales in comparison to past events.  

You don't have to look too far back to see this. Seasoned investors will recall the not-so-happy days of early 2020, when the ASX 200 fell from 7,125 in late February to 4,816 a month later - a drop of 32% in four weeks as borders closed in response to the pandemic.  

Yet, less than a year later, the Aussie share market had not just recovered, it was trading above its pre-COVID levels. 

Investors with even longer memories will recall the global financial crisis of 2008-09, and before that the Black Monday stock market crash of October 1987.  

Maybe I'm showing my age here, but each of these events were driven by different factors. The common thread was media headlines about how many billions (even trillions) of dollars were wiped off markets.  

What we hear less of is that markets eventually stabilised, then recovered and went on to reach new highs. 

I certainly don't have a crystal ball but I'm willing to bet that in time, this is exactly what will happen this time around.  

Could we be facing a recession? 

This is where that crystal ball would come in handy. I am seeing mixed views on the economic outlook right now.  

In light of trade policy uncertainty, JP Morgan Research has raised the probability of a global recession to 60% — up from 30% at the start of the year.  

The International Monetary Fund (IMF) noted this week that "the global economic system under which most countries have operated for the last 80 years is being reset, ushering the world into a new era". As a result, the IMF has scaled back its global growth forecasts.  

There's no doubt, uncertainty over tariffs and trade makes it difficult for companies to invest for the future by building new factories or expanding into new markets.  

That said, here in Australia, we have a few economic aces up our sleeve. Firstly, the US is not our major trading partner. That title goes to China followed by Japan, South Korea and India. 

In addition, our floating Aussie dollar acts as a shock absorber. A weaker Australian dollar isn't good news for anyone planning an overseas trip. But it does make Australian products more competitive on the global market, and that's good for our economy. 

There is also a chance we could see interest rates head lower, which will further support the economy.  

NAB is expecting the Reserve Bank to cut rates by 0.5% in May, followed by 0.25% rate cuts in each of July, August, November and February. If that happens, it will take the cash rate down from 4.1% at present to just 2.6% by February 2026. 

NAB isn't alone. ANZ expects the Reserve to lower the cash rate by 0.25% at each of its meetings in May, July and August. 

The CommBank view is that the RBA will likely cut rates by 0.75% in total by year's end, and our biggest bank recently noted that "a rate cut in May is a done deal" if inflation drops in line with its expectations, which won't be known until the end of April. 

By the way, the prospect of rate cuts highlights why bailing out of growth assets such as shares or ETFs and putting money into cash savings could derail your long-term wealth.  

More broadly, Trump has been described as being "transactional". So, it's possible the man who authored 'The Art of the Deal' may enter trade negotiations that eventually see tariffs lowered among our major trade partners - notably China.  

What should you do as an investor? 

The simple answer is nothing. 

If you have a portfolio geared towards your long-term goals, there may be little to be gained from making knee-jerk reactions to the daily, and sometimes wildly pivoting, announcements coming out of the White House.  

Of course, it's easy to say, 'hold tight'. It can be a lot harder to do. 

Even so, holding firm means avoiding turning on-paper losses into real, hip pocket losses, which can only make it more expensive to get back into the market later on. 

The verdict 

Frankly, none of us can control what's being decided by Trump. What we can control is our own money.  

You may decide lower market values are dishing up some share market bargains. If that sounds like you, dollar cost averaging can be a helpful strategy to smooth out the current market volatility. 

But if you don't immediately rely on the money from your investments - be they held inside or outside of super - it doesn't make sense to make radical changes to your portfolio. It really is a matter of riding out the storm. History tells us the storm will pass.