Investor call - Turbulence in the markets
As everyone knows by now, on April 2 in the Rose Garden, President Trump announced a wide range of import tariffs on just about every country in the world.
The tariffs were calculated by dividing each country's trade deficit by its total imports, and dividing that percentage by two. A calculation that could be questioned, but it is what it is.
The introduction of these tariffs caused a lot of concern, and threatened to bring the economy to a standstill. Meanwhile, a lot of countries showed their willingness to renegotiate trade relations with the US, and a pause was made yesterday, postponing most of the levies for 90 days.
The big exception here is China, which resisted hard and immediately introduced countermeasures, and where the escalation continues merrily for the time being by auction. But here too, sooner or later, both sides will have to come to the negotiating table. It is important to note here that the U.S. depends more on imports from China - because it mainly imports products - while China also imports from the U.S., but these are mainly raw materials, which can also be bought elsewhere in case of need.
Historical context
If we zoom out for a moment and put things in historical context, we see that import tariffs are nothing new. Notably, Herbert Hoover introduced the Smoot-Hawley Tariff Act in June 1930, which imposed import tariffs averaging 60% on more than 20,000 products in an attempt to protect the domestic market. Then those tariffs mostly backfired: U.S. exports fell by more than 60%, ushering in a period of rising unemployment and deflation. In which farmers were hit especially hard, as they could no longer dispose of their surpluses abroad.
Today, the economy looks completely different, and has become much more complex. But it can certainly not be ruled out that the result is the same, and import tariffs just backfire. Something the markets clearly feared last week. But at the same time a reason to reach a negotiated solution acceptable to all parties.
Impact on markets
The effect of the announced import duties and increased uncertainty was of course immediately felt on the markets, which have become increasingly nervous over the past few days. This resulted in blood red prices. Equity markets were particularly hard hit, with declines of between 10%-20%. After the announced 90-day pause on tariff imports, about half of the losses could be made up in one fell swoop. But the markets remain volatile, and the situation changes every day. To monitor the situation, we are keeping an eye on three things.
- The first aspect is the VIX index. This is a measure that reflects the volatility at which options are priced. In the past, we have seen that the days when the VIX reaches its peak, that is often the time when stocks have the most emotional reaction behind them. Again, that seems to be the case, given today's relief rally. Although it is still too early to draw any clear conclusions here.
- The second aspect is: watching what interest rates are doing. In a recession, the logical reaction is for interest rates to fall sharply. That was the initial reaction, but shortly afterwards interest rates started to rise sharply. Which makes bonds not provide a buffer in portfolios, and which also makes it more expensive for governments to start financing their deficits. Perhaps that in particular is what has pressured President Trump to press the pause button. Although there had been some backlash within his party (and among key donors) in recent days as well.
- And a third gauge is U.S. high yield bonds. There we did see spreads widen: We went from very low levels there to more average levels. But we are still far from the levels that showed up during the banking crisis or corona pandemic. So credit markets are not yet worried that a recession might be coming. On the other hand - with the rise of private credit - this market has become a somewhat less reliable indicator.
Potential impact on businesses
The exact impact of import tariffs on companies is difficult to assess as an investor. Even at most companies internally, this is a difficult task. Questions that can be asked are:
- What proportion of sales are made in the US? And what portion of these sales are produced outside the US?
- How quickly can production from outside the US be shifted to the US, or to countries with more favorable import tariffs?
- To what extent is the supply chain exposed to import tariffs?
- How price sensitive is the consumer?
An example: Quasi all textiles are produced in Vietnam and China, so Skechers, Nike and Adidas, for example, are similarly impacted. Even with the duties, it is too expensive to start producing shoes in the US, so the import duties will simply be passed on to the consumer. But the question then becomes: to what extent will consumers then buy fewer shoes? And will he remain brand loyal, or will he shift toward the cheaper brands? And are some brands taking advantage of this to only partially pass on the price increase, to try to gain market share, or is there price discipline in the industry?
Many questions, to which no one can formulate a precise answer at this time. And the situation regarding rates also changes every day.
How to invest.
As an investor, it is a matter of trying to estimate all these things. But at the same time certainly not to lose sight of the longer term in favor of the rate-of-the-day.
In doing so, focus on companies with healthy balance sheets so that a more volatile period can be weathered without too much damage. Keep in mind that the high volatility may continue for some time. And that also creates opportunities to pick up healthy companies at low valuations.
Last but not least, be aware that panic is a bad advisor. The initial recovery is often the most powerful (as we saw in the markets yesterday), and missing that initial recovery (when temporarily exiting the market) makes for significantly lower returns over the longer term.
