Executive summary
- Renewed stress from tariffs on Canada, Mexico, and China coming into effect have triggered a selloff in global equity markets.
- Reduced spending, and weaker growth indicators, along with strained relations between traditional Western allies, adds further uncertainty.
- We think this selloff is likely to be temporary – as the core fundamentals of growth, liquidity, and inflation remain supportive.
- There have been signs of tentative rebounds in major equity markets. We are not in capitulation mode – demand for downside protection from active managers is not rising sharply (as seen by the S&P 500 put/call ratio).
- Reciprocal tariff regimes may leave relative terms of trade for most countries unchanged (this matters more in influencing competitiveness and trade market share).
- Most countries exporting to the US also know how to maneuver their way, and improve market share over time.
Stresses from US political dissatisfaction come to the fore
From 20 February, US equities1 started to fall. Thereafter, US retail investor sentiment (as measured by bulls vs. bears in the Association of Individual Investors’ Survey), had sunk to extreme lows. Investors suffered a culmination of ‘risk-off’ shocks – from variable spending and growth indicators to significant dissatisfaction with the performance of President Trump.
The February Gallup Poll revealed that Americans had scored a terrible report card for Trump, especially on external policies that are diverting his attention from addressing domestic issues and managing the US economy (see Figure 1). Into his first 100 days of power, the majority of American voters thus far, judged the performance of President Trump as being the worst of any president since 19532. Such poor sentiment is likely to have made US households and firms rethink some of their spending and investment plans.
Figure 1: The majority of American voters are unhappy with President Trump’s performance thus far into his first 100 days
The tense relationship between the US and Ukraine has likely contributed to the risk-off dynamics but the bigger picture is that the American public was already very dissatisfied with President Trump’s performance across external policies and managing the US economy.
Just days after Volodymyr Zelenskyy and the US President clashed, European leaders at their March summit in London offered a strong show of support to the Ukrainian President and promised to do more to help his nation. Sir Starmer, Prime Minister of the UK, stated: “It is time to act, to step-up and lead, and to unite around a new plan for a just and enduring peace”3.
Developments may increase the pressure on Europe to spend more on defence and then present a united front to President Trump in seeking US support as a peace-keeping backstop. Notwithstanding the possible setback to the process of ending the Russia-Ukraine war, as Europe re-groups, they may be able to foster a superior peace agreement that has stronger support from all NATO members.
Stresses from greater growth uncertainty
Since the COVID-driven recession, US growth has averaged 2.3% p.a, with 25% of the time recording weak growth below 2% and 40% of the time hitting quarterly growth rates above 3% p.a4. Typical trend growth assumptions for the US are around 2% p.a, as the Fed and the IMF assume. Since the election of President Trump, US real growth has remained variable, with 2.3% p.a in Q4 2024 (and 2.8% for 20245), before surging to 2.9% p.a in January (based on the Fed’s nowcast), and thereafter falling back to 2.3% in February6.
While US growth has been variable, it still seems to be tracking around its post-COVID average, and although expected earnings growth has fallen, it remains a solid 12% for this year (see Figure 2). US liquidity growth also remains robust, and PCE inflation is sticky as anticipated – tracking the 2.5% p.a that the Fed has forecast for 20257, with the return to the 2% target8 not likely until next year.
It is our view that the core fundamentals of growth, liquidity, and inflation remain supportive, but investors are suffering a sharp ‘risk-off’ shock for now.
Figure 2: The majority of American voters are unhappy with President Trump’s performance thus far into his first 100 days
Source: LSEG Datastream, Mar 2025.
Risk-off mode likely temporary
Key reasons why we believe this is a temporary adverse sentiment-driven correction, is because returns have tried to rebound (see Figure 3), and the demand for downside protection from active managers has not increased – holding around its average (i.e the put/call ratio has remained steady. See Figure 4).
Figure 3: Performance across key DM equity markets (EPS and total returns)
Source: LSEG Datastream, Mar 2025.
Figure 4: US equity volatility (VIX)9 and investor demand for downside protection (the put/call ratio)
Source: LSEG Datastream, Mar 2025.
We believe US productivity growth (driven in part by AI-related gains) should remain strong, which will help contain real unit costs of production, and support robust earnings growth and equity returns for investors. Our outlook remains unchanged from that presented here: A ‘3E’ Environment: Excess returns from Exceptionalism, Evolution, and Liquidity – Fullerton Fund Management.
We have explained in more detail how tariffs can shape the investment environment – see: Impact from Trump 2.0 tariffs – Fullerton Fund Management. A key development that is quite different from the tariffs imposed back in 2018 is the prospect of a Reciprocal Tariff Regime. President Trump has called it a “very fair and beautifully simple system”10. Such a scheme can become beneficial for all parties over time because countries exporting to the US know exactly how to improve their market share. Any ‘tit-for-tat’ outcomes for tariff settings will leave relative terms of trade positions (which matter for competitiveness and market share), mostly unchanged.
Within fixed income, credit markets have generally been well-behaved. We observed stable credit spreads in Asia, with some modest tightening on average in the high yield sector, and modest widening in US credits.
1 As referenced by the S&P 500.
2 President Trump’s job approval rating (45%pts) is 15 points below the historical average (61%pts) for all other elected presidents in mid-February since 1953. Source: Gallup 19 Feb 2025.
3 Source: Reuters News, 2 March 2025.
4 Refers to quarterly US GDP growth numbers. Source: LSEG Datastream, February 2025.
5 Source: LSEG Datastream, February 2025.
6 Based on the Federal Reserve Bank of Atlanta which publishes the GDPNow data to track GDP.
7 As per the Fed’s “Summary of Economic Projections” table, in February 2025.
8 The Fed’s inflation target as disclosed in https://www.federalreserve.gov/faqs/economy_14400.htm.
9 When adverse shocks have hit in the past, the highest ever US equity volatility (VIX) reading was 83 on 16 March 2020 during the COVID-driven recession. In the Global Financial Crisis (GFC) the VIX hit 81 on 20 November 2008. Average VIX volatility is 19 (since data began in 1990).
10 Source: The UK Times, 14 February 2025.
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