What should be the next move in this volatile market?
In the wake of Donald Trump’s aggressive tariff announcement, global markets have plunged into turmoil, leaving investors grappling with uncertainty and seeking answers. As markets experience its most significant upheaval since the pandemic, the pressing question for investors becomes: What should be the next move in this volatile environment? Chief Investment Strategist Ralph Wessels shares his outlook on navigating these challenging market conditions.
Since Trump’s Liberation Day equity markets and yields decline, while spreads increase. What is going on?
These tariffs were more severe than even the most negative predictions, triggering a swift reaction in financial markets. Despite Trump’s openness to negotiations, markets remain in a heightened state of risk aversion due to fears of recession. The main concern is that trading partners may retaliate with reciprocal tariffs, further escalating the trade war. For instance, rumors of negotiations quickly turned into retaliatory actions, with countries like China responding with its own tariffs against the US.
The intensity of the sell-off seems to remain high, and the fear index or VIX is now around 50-plus levels. What does that mean for investors?
The surge in the VIX, commonly known as the "fear index," highlights the market's volatility and investor anxiety . The VIX recently crossed the 50 mark, a level indicative of extreme market fluctuations. Historically, the VIX reached similar heights during major crises like the COVID-19 pandemic and the 2008 financial crisis, where it soared above 80.
If history were to repeat itself, buying at these elevated levels could potentially lead to above average returns over longer time horizons, such as one, two, three, four, and five years. However, this does not guarantee the VIX won't climb even higher or that the bottom is in. The current situation illustrates uncertainty and fear of escalation in trade tensions and a looming recession. This makes predictions challenging.
How long will these declines continue, and is this comparable to previous sharp stock market declines?
The current sell-off has everything to do with uncertainty of the economic outcome. The duration of these declines depends on resolving the uncertainty surrounding trade negotiations. With an impending deadline on April 9, markets are keenly watching for any signs of de-escalation. If an indication of negotiations with major trading partners occur before this date, resulting in a postponement of the reciprocal tariffs, markets could see a relief rally. However, if no positive developments arise, the sell-off may persist, driven by escalating fears of a prolonged trade war and potential recession.
What is the role of central banks?
Central banks will only come into play when liquidity is drying up and financial conditions tighten severely - a scenario that would echo past crises like the 2008 financial meltdown and the COVID-19 shock. And we are not there yet. However, the risk remains that, with ongoing market sell-offs, a bank, hedge fund or the like will collapse, risking a domino effect , potentially prompting central banks to intervene.
The Federal Reserve (Fed) is focused on managing inflation, influenced by tariff-induced pressures, and continues its tightening policy. In contrast, regions experiencing deflationary effects, such as the eurozone, might see the European Central Bank (ECB) cutting interest rates further to stimulate growth.
Do you expect a recession and what are your scenarios?
We do not anticipate a recession. Though the odds of a US recession have increased. But for now, we expect stagnating growth rather than a full-blown recession. We have adjusted our growth projections for the US, lowering them by 3 percentage points over the next two years.
The effects of frontloading growth will likely diminish by the third and fourth quarters of 2025. Meanwhile, Europe is expected to first experience stagnation, before fiscal stimulus will be supportive in 2026. Overall, the eurozone is less impacted compared to Asia, where China is facing significant challenges.
How are you positioned in the portfolio?
We maintain a slight overweight in both equities and bonds, with a preference for high-quality bonds. They benefit from lower yields and protect the portfolio in the current situation off-setting some of the losses in the equity portfolio. Earlier this year, we reduced our exposure to the US, moving to a neutral stance, and upgraded our cautious view on the eurozone to neutral. Consequently, we are now positioned neutrally across all regions.
How are the different sectors impacted?
This is mainly a story about defensive versus cyclical sectors. Information technology and energy are experiencing the steepest declines, while more defensive sectors like utilities, consumer staples and healthcare are showing relatively better resilience. These sectors are not immune to losses, however their losses are smaller compared to the broader market.
Will you make any changes?
We are not making any major changes at this time, but we are continuously evaluating our strategies in light of current conditions.
What should clients do?
For clients navigating these turbulent markets, it is of utmost importance to remain calm and not trade extensively. That is often a loss-making strategy. Patience and a long-term perspective are crucial. While sentiment is currently depressed, market conditions can shift rapidly, presenting opportunities. However, it's essential to proceed cautiously and consider individual risk preferences when making investment decisions. The volatile environment, as indicated by the high VIX, suggests that maintaining a balanced, diversified portfolio remains important.
We will continue to monitor the situation closely and provide updates as necessary to keep you informed of any developments.