Market overview
Everybody knows the idea that “if something ain’t broke, then don’t fix it” - but equally, if something is fixed, then for pity’s sake, don’t break it. Over the last three months, investors across all asset classes have probably been wishing that Donald Trump and the new US Administration would follow this advice, but when it comes to The Trumpster, we shouldn’t be surprised to learn that he is a law onto himself and the near-gravitational pull he has towards social media means that everyday has brought a new series of posts to whipsaw the market. In time, he may realise that like that sign in the shop, you break it, you pay!!
A 'tariffying' reaction!
Looking at the events running up to and after the so-called ‘Liberation Day’ on April 2nd, when US President Donald Trump unveiled his ‘reciprocal’ tariffs, it’s hard not to scratch your head and wonder how this makes sense. As an opening gambit, the sweeping assortment of levies proved to be considerably worse than expected, but the common view/hope was that these would eventually be negotiated lower, though evidently not before some reprisals were announced.
The tariffs are really just a tax on consumption, and the fact that consumer confidence has started to turn south suggests that real people are aware of the potential impact of tariffs. While some might suggest that this has yet to really manifest itself in the data, the real impact will be felt after these new ‘taxes’ go into effect. These are not small tariffs, and the economic implications may not be the only impact. There will likely be foreign policy implications, and non-US countries are likely to shun US products, companies and investment assets moving forward. For all of Trump’s complaints about how badly the US has been treated by the rest of the world, it’s hard not to notice that US economic growth has handily outpaced most other developed economies during the globalisation era, and US equity market cap represents a large majority of the global total.
Taco for everyone...
But April 9th proved to be the start of a series of TACO (Trump Always Chickens Out) events as first we saw a rollback of the reciprocal tariffs for everyone bar China, then a stepdown of the rhetoric around sacking US Federal Reserve (Fed) Chair Jay Powell, and finally the de-escalation of trade tensions with China with a significant reduction in reciprocal tariffs by both sides – albeit only for 90 days.
Although the first of the major central banks to start cutting interest rates, the Fed has been on hold since late last year as the combination of already sticky inflation, particularly in the services sector, has combined with the potential for a lock step higher in prices once the impacts of the Trump Administration’s tariff policy filter through to the economy.
While it might be easy to just give in and reduce interest rates, the impact of this wouldn’t be seen for some time. From the Fed’s perspective, setting monetary policy that will take some time to work is very difficult to do when you have no clear line of sight to the type of economy you could be facing later this year and into next year, depending on the fiscal policy that the Administration can’t even make its mind up on today. The ultimate impact of all of this will depend on what the global trading regime looks like in the end, which will take considerable time to play out.
Deficit debate
The announcement of a de-escalation of trade tensions between the US and China had a significant impact on stocks and capped an extraordinary 22-day surge, ranking with the biggest such rallies since 1990. Despite the market’s remarkable round trip however, it’s doubtful that this episode can be dismissed as though it hadn’t happened.
If you told people on April 1st that we’d be where we are today, they probably would have said that that’s about the best they could have hoped for. But the concerns that animated the world before ‘Liberation Day’ have not gone away, and the pressure from the bond market to limit fiscal largesse is intensifying. Federal revenues certainly suggest that tariff policy is having an impact, though probably not enough to offset declines in federal tax revenue elsewhere. Meanwhile, government expenditure is up some 7.4% year-on-year in 2025, and although the Trump Administration would no doubt lay the blame for that on Joe Biden’s penchant for fiscal ‘flaithiúil’, it is interesting to note that spending was only up 1.7% at an equivalent point last year.
It all suggests that the federal budget remains quite vulnerable, and aggressive tax cuts may leave a black hole where revenue used to be, even if most of the tax cuts simply represent a rollover of the TCJA measures set to expire at the end of this year. It is going to be tough to make much progress on the budget deficit with spending and income experiencing equal growth rates, let alone if the government plans to reduce its revenue base. As such, it feels like the bond market will have an appointment with another deficit-worry narrative by some point in the summer. While stock market operators may choose to focus on the good news of potential tax cuts, it’s not a one-way street, particularly for the bond market – and the de-rating of US government debt by Moody’s in mid-May, served to re-focus attention on the importance of this cohort!
Passing the torch...
The last few weeks have seen a major change at the top of two organisations – one voluntary and one involuntary. In the case of one, it took several secret ballots by 133 people to decide who would take the helm, while at Berkshire Hathaway the succession plan was far more transparent and choreographed – even if the timing did take most people by surprise.
Over the years the Sage of Omaha has provided investors with countless words of wisdom on the art of investing and stock analysis. For those that are new to investing, there is always the temptation to plough in when market sentiment is positive, and you see lots of people around you are making money. The ‘Fear of Missing Out’ is often a very strong attraction. Taking an excessive risk, especially with something you are new to, does not make any financial sense or more eloquently put “you should never test the depth of the water with both feet” and “games are won by players who focus on the playing field; not by those whose eyes are glued to the scoreboard”.
Himself and Charlie Munger often said that “it’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”. While poor businesses may be purchased cheaply and sold for a profit after a slight improvement in results, good businesses reward their shareholders over time as the business grows and compounds.
But perhaps the best piece of advice he has given should be deployed long before you start the process of investing or buying companies – “an idiot with a financial plan can beat a genius without a plan”.
Warning: Past performance is not a reliable guide to future performance. The value of investments may go down as well as up. Returns on investments may increase or decrease as a result of currency fluctuations. Forecasts are not a reliable indicator of future results.
J & E Davy Unlimited Company, trading as Davy Private Clients, is regulated by the Central Bank of Ireland. J & E Davy (UK) Limited, trading as Davy Private Clients UK, is authorised and regulated by the Financial Conduct Authority. Davy Group is a member of the Bank of Ireland Group. J & E Davy Unlimited Company, trading as Davy and Davy Private Clients, is regulated by the Central Bank of Ireland. Davy is a Davy Group company and also a member of the Bank of Ireland Group.