What a week it’s been! It is hard to know exactly what to write because minutes after publishing an article it could all be out of date. This is my third drafted communication, as the previous two drafts were out of date before I could hit send!
I wanted to reach out to discuss the recent “Liberation Day” announcement by President Trump, imposing new tariffs on all goods entering the US.
While markets had anticipated some form of this, the extent and rationale behind the tariffs caused significant turbulence. Today I’ll be updating you on the situation and assure you that we are closely observing its potential impact on your portfolio.
What was announced
President Trump has announced a 10% tariff on all imports from all countries and much higher reciprocal tariffs on many countries. China, for example, was levied with a 34% tariff on top of the initial 20% tariff imposed earlier this year and then increased it to 125% after reciprocal tariffs were announced by China in response. The game of tit-for-tat continues, with more announcements anticipated! The European Union will face a 20% tariff.
Australia itself faces a new 10% tariff on all exports to the US, which was a disappointing outcome as we have a free trade agreement with the US.
Then President Donald Trump announced a 90-day pause on reciprocal tariffs above the 10% baseline tariff, affecting more than 75 nations, which includes the European Union, but notably did not include China.
On Monday we saw $97b erased from the ASX amid global market wipeouts, where the Australian share market recorded its biggest one-day loss in five years, with the S&P/ASX 200 Index plunging 4.2 per cent.
On Tuesday we saw the Australian share market staged a strong rebound on Tuesday, recording its biggest one-day gain in over two years. The S&P/ASX 200 Index surged 2.3 per cent.
On Wednesday we saw the Australian share market resume its downward trajectory on Wednesday, as heightened trade tensions between the United States and China spurred a broad-based commodity sell-off. The S&P/ASX 200 Index fell 1.8 per cent.
On Thursday we saw the Australian share market have its best day since 2020, where the Australian share market surged, adding nearly $100 billion in value as investors reacted positively to overnight gains on Wall Street. The catalyst was United States President Donald Trump’s announcement of a 90-day pause on reciprocal tariffs affecting more than 75 nations. The S&P/ASX 200 Index jumped 4.5 per cent.
On Friday (today) we saw the Australian share market close slightly down at 0.82% after being more negative at open and recovering over the course of the day in what was a comparatively calm day ahead of the weekend.
All this movement has had me running around like a squirrel, wondering if I’m Arthur or Martha!
The longer-term impact
While the stated intention of Trump is to revive US manufacturing, this will take years to achieve. The immediate result will be increased prices to US importers, which will either be absorbed by the importer (reducing US corporate earnings) and/or the consumer, which may exacerbate the decline in sales and consumer which has occurred in recent months. The overall impact will be to slow economic growth in the US.
For Australia, the US is our 5th largest trading partner and only represents 5.4% of our exports. China is by far our largest export market at 37%, followed by Japan at 11%, with Asia as a collective representing a massive 81% of our exports.
We also need to remember that despite the higher prices, exports will continue to the US. While much depends on how significant tariff retaliation is by other countries, China, for example, may further stimulate its economy, which would assist our exporters.
The bigger threat comes from the hit to global growth from Trump’s trade war, particularly in China and Asia, which will likely result in less demand for our exports posing a threat to the expected pick-up in Australian economic growth
Furthermore, even if these tariffs do not end up being in place for the long term, the increased uncertainty will persist, disincentivising investment and dampening global growth.
Therefore, shares are likely to experience more downside.
The silver lining
Whilst the overall impact of these tariffs and exchanges are negative, there are some silver linings to keep in mind.
While there may be an ongoing correction in the global stock markets, we expect there will be some moderation in these tariff levels as countries negotiate with the Trump administration.
There are also positive impacts associated with President Trump’s agenda, including tax cuts and de-regulation, which are good for US business.
In addition, the US Federal Reserve and, indeed, the RBA in Australia is likely to respond with further interest rate cuts should the economy show signs of faltering.
During any share market pullback, it’s also important to remember that these events are healthy and normal – their volatility is the price we pay for the higher returns they provide over the long term.
Whilst markets are down, Australian shares still offer attractive income (or cash) flow relative to alternatives such bank deposits. We have seen this before, during the last two largest market events of the COVID-19 pandemic and the Global Financial Crisis before that, where Australian businesses continued to generate consistently strong incomes despite large fluctuations in prices.
Staying the course
During times of market uncertainty, it can be tempting to react impulsively to bad news in the market. However, data consistently shows that staying invested through periods of volatility is almost always the best strategy, and we don’t see this event as any exception.
It’s natural to feel nervous during market downturns. But history tells us clearly—panic selling almost always leads to regret.
– Charles Schwab, renowned investment expert
We are very attuned to the economic and investment market conditions and have structured your investment portfolio to weather the ebbs and flows in markets. For our ongoing clients. we always ensure portfolios are highly diversified and focused on quality stocks and interest rate securities that are resilient to market fluctuations and recover quickly after periods of market stress.
It’s important to keep in mind, as we live in a highly connected and digital world with a 24-hour news cycle always competing for our attention: News and social media will present the negative (and unfortunately more exciting) news, over the commentary of cooler heads.
Where you can, it’s best to do your best to turn down the noise and seek to ignore the negative news flow. Doing so wouldn’t be ‘putting your head in the sand’, it would be refusing to be manipulated by news and services desperate for your attention.
The only people who get hurt on a roller coaster are the ones who jump off.
– Dave Ramsey, personal finance author
The right advice in uncertain times
Market volatility is uncomfortable, but reacting impulsively can turn temporary losses into permanent ones. Now is a good time to revisit your financial plan and speak directly with us. Regular, ongoing advice can ensure your strategy remains appropriate, help cut through the noise, and keep you on track towards your long-term financial goals.
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