Liberation Day? The week ahead

Important information - the value of investments and the income from them can go down as well as up, so you may get back less than you invest.

There’s only one story in global markets this week and it’s the next round of Trump tariffs - what the US President has dubbed Liberation, and others prefer to call Demolition, Day. 

Taxing times 

Wednesday is the day that Donald Trump has promised to impose a new set of broad-based tariffs in his ongoing bid to reshape the global trade landscape. Unlike the levies imposed so far, these look like being comprehensive, with no concessions. Investors are running for cover. 

The cracks started to show on Friday when the US stock market fell by more than 2%. The sell-off deepened and widened on Monday as markets in Asia took an even bigger hit, with Japan, Taiwan and Korea down by more than 3%. Falls in Europe were smaller, but significant. 

The President’s policies are so unpredictable and change at such short notice so no-one is prepared to second guess what will actually happen this week. Rather, they are selling first and asking questions later. The small rally last week from the US market’s 10% correction since February has been wiped out. 

The big question for investors now is whether the correction turns out to be a buying opportunity or the prelude to a full-blown bear market. Historical analysis from Goldman Sachs suggests the key to that is whether or not the ongoing slowdown in the US economy turns into a recession or not. The odds of the worst outcome - recession coupled with persistent inflation - are shortening. 

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What to watch for 

History is not that helpful to investors deciding whether there’s worse to come. Plot all the corrections from the past and there’s a wide dispersion of subsequent returns. Sometimes markets rally, other times they take a turn for the worse. 

One signal that’s so far not flashing red is so-called credit spreads - the extra income demanded by corporate bond investors over that provided by government bonds. This spread had become tight in the more optimistic days following the US Presidential election and has not (yet) widened much. In a recession, it probably will do so and investors will watch the bond market closely for clues. 

Other measures to keep an eye on include the outlook for company profits. We are just a couple of weeks away from the next quarterly earnings season, and so far expectations remain for a continued improvement in corporate results. Last year they rose in the low double digits and more of the same is pencilled in for 2025. In the long run, earnings are the key driver of stock markets. 

The level of the market is also determined by the multiple of those earnings that investors are prepared to pay. That has started to ease back. In the most expensive market, the US, it has fallen from 23 times earnings to 20 - off the peak but still high by historic standards. More worrying is the equivalent multiple for the Magnificent Seven technology stocks, which has fallen from 42 but still stands at a punchy 30. It will be hard for the overall market to hold up if tech stocks continue to retreat. 

Safe havens

A key difference between today’s correction and the last big market reversal - in 2022 - is that this time around there have been places for investors to find shelter. As investors have rotated out of the US market, they have invested in previously unpopular markets like Europe and China. That has helped smooth the ride for investors with balanced, or diversified, portfolios. 

Other assets have helped as well. Gold, in particular, has lived up to its reputation as a safe haven in challenging times. This week it hit yet another all time high of $3,128 a troy ounce. As well as its port in a storm characteristics, gold is being boosted by concerted buying on two fronts. First, central banks are looking to top up their reserves with an asset that can’t be frozen or confiscated. Second, retail buying in India is rising fast as that country’s stock market runs out of steam. Indians have always loved gold as a store of value, and it is coming back into favour as share prices moderate. 

• Read: Gold price: the latest analysis and our fund picks 

Another diversifying asset that’s on investors' radars again is the ultimate safe haven - US Treasury bonds. Their yield, which moves inversely to price, has fallen to 4.2% from a recent high near 5% as investors have started to price in a growing likelihood of lower US interest rates. The Federal Reserve is loath to cut rates in the face of persistent inflation, but investors are betting that it will have no choice if the US economy heads further towards a damaging recession.

And finally, don’t forget the deadline to use your 2024/25 ISA and personal pension allowances ends at midnight on Saturday (5 April). If you can’t decide where to invest but want to secure your ISA and SIPP allowances, you can park your money in cash and choose funds later. 

• Read: Last-minute ISA ideas: what Tom is doing
• Read: Last-minute ISA? These are the world’s cheapest stock markets
• Read: ISA fund ideas: investing in Asia for income