Another week, another tariff - market week

It’s hard to keep up. The Trump juggernaut is careering down the fast lane, with investors clinging on for the ride. Two weeks ago, the DeepSeek drama dominated the headlines; last week, it was broad-based tariffs on Mexico, China and Canada; this week, its tariffs again, but this time targeted levies on steel and aluminium. 

The protectionist agenda 

As it happens, it’s the same three countries in the cross hairs this week. Mexico, China and Canada are the three biggest exporters of steel to the US, contributing nearly half of a big deficit in this key building block of the modern globalised economy. In 2023, America imported $82bn of steel, but exported only half as much. It’s an obvious target for tariffs. 

As with all protectionist levies, the fear is that the new targeted tariffs will lead to higher input costs for American manufacturers and consumers. And, as with last week’s announcements, it is by no means clear whether the tariffs are for real, or a negotiating ploy. Investors are, sensibly, waiting for Trump’s actions rather than his words. There is often a gap between the two. 

So far, investors have largely taken tariffs and the threat of trade war in their stride. The narrative remains that, while the President may be unpredictable, he is a pragmatist. He sees the financial markets as a gauge of his success, and he is unlikely to persist with any measures that the markets dislike. 

• Listen: Market relief after first brush with Trump tariffs 

Standing back  

Despite the uncertainty, therefore, markets are holding up. The S&P 500 has lost momentum, but it is hovering above 6,000. Here, the FTSE 100 has benefited from the strength of the dollar, which boosts exporters and those companies whose sales are largely denominated in the US currency. 

Sentiment is weaker than it was. Just 62% of US stocks are running ahead of their 200-day moving average. The equal-weighted benchmark, a guide to broader sentiment, is also below its recent peak. Only around half of its constituents are above their 50-day moving average. 

But fundamentals look positive. Nearly two thirds into the fourth quarter earnings season, around three quarters of stocks are beating profit expectations. The expected growth rate for the quarter is now 13%, well up from the 8% at the start of earnings season. For the year as a whole, we can expect 11% growth, the third year in four that earnings have grown, and justification for the rise in markets since the pandemic. 

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Finding balance 

An increasing challenge for investors, though, is working out how to maintain a diversified portfolio in a higher interest rate environment. When bond yields stand at today’s higher levels, shares and fixed income investments tend to track each other higher and lower. That reduces the incentive to own a mixture of both bonds and shares. And it means that investors need to look further afield, into commodities and property, to gain that portfolio balance. 

Gold has been one of the biggest beneficiaries of this trend. The precious metal last week hit a new record high of nearly $2,900 an ounce. Demand for gold, from central banks as well as other more price sensitive investors, stands at high levels. 

• Watch: Tom Stevenson Investment outlook - alternatives 

What to watch this week 

Inflation and growth are both in the spotlight this week. In the US, Wednesday will see the latest CPI inflation number, with a modest fall in the rate of price rises expected. The core level should ease back to 3.1% from 3.2%, with the headline level unchanged at 2.9%. That is unlikely to change the Fed’s mind when it comes to interest rate cuts. It said last month that it was not inclined to cut rates further until the data suggested more easing was necessary. 

Here, the focus is on growth - or rather the lack of it. Thursday’s fourth quarter GDP data will most likely show a 0.1% fall in the size of the economy over the last three months of 2024. That follows no growth in the third quarter, which is as close to recession as we can get without actually triggering an official downturn. It’s bad news for a government which set out its stall last summer as a driver of growth but then implemented policies, like a rise in employer national insurance contributions, that seem more likely to shrink the economy.   

• Read: Top 10 best-selling ISA and SIPP funds in January 

• Read: Ten for 10: Funds to buy and hold for a decade 

Important information - investors should note that the views expressed may no longer be current and may have already been acted upon. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Overseas investments will be affected by movements in currency exchange rates.  Investments in emerging markets can be more volatile than other more developed markets. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to one of Fidelity’s advisers or an authorised financial adviser of your choice.