Markets were rocked last week after President Donald Trump’s ‘Liberation Day’ speech triggered panic with the announcement of sweeping new tariffs.
It’s impossible to predict what will come next and the situation is constantly evolving. But in every period of market panic, there are important things to keep in mind. In this piece, we look at what has transpired and the important things to focus on during times of significant uncertainty.
What has transpired?
On 3 April 2025, US stock markets experienced their most significant daily losses since the COVID-19-related sell-off in March 2020. These sharp declines followed President Trump’s so-called ‘Liberation Day’ speech on 2 April, in which he announced sweeping tariffs — including a 10% baseline on all imports and significantly higher duties on countries like China.
The steep declines in indicators like the oil price, bank shares and the US long bond yield signalled that the market was shifting into fear mode — with growing concerns about a US (and global) recession.
By midday on 4 April, China retaliated by announcing a 34% tariff on all US goods. This pushed markets deeper into panic mode, as escalating fears of a global trade war and rising uncertainty triggered further declines.
A recent article by The Economist, ‘President Trump’s mindless tariffs will cause economic havoc but the rest of the world can limit the damage’ sums up quite well how the majority of the world is feeling:
“If you failed to spot America being “looted, pillaged, raped and plundered by nations near and far” or it being cruelly denied a “turn to prosper”, then congratulations: you have a firmer grip on reality than the president of the United States. It’s hard to know which is more unsettling: that the leader of the free world could spout complete drivel about its most successful and admired economy. Or the fact that on April 2nd, spurred on by his delusions, Donald Trump announced the biggest break in America’s trade policy in over a century—and committed the most profound, harmful and unnecessary economic error in the modern era.”
President Trump has effectively set aside David Ricardo’s 19-century ‘Theory of Comparative Advantage’ in favour of Team Trump’s concept of ‘Equal Trade’. Ricardo proposed that each country should produce the goods and services in which they have a comparative advantage. Trading on this basis leads to improved use of global resources and increased wealth for all. In contrast, Trump’s approach imposes tariffs on countries simply because of their unequal trade balance with the US.
The reasoning behind the tariff proposal mainly reflects one side of the story — and it’s both economic and political. Many major trading partners to the US focus heavily on exports rather than on domestic consumption expenditure, which impacts US manufacturers and their workers (many of whom form part of Trump’s support base). That’s a valid concern. However, the flip side is that the current global setup – where the US imports more than it exports – also supports the global demand for the US dollar, the global reserve currency. Countries selling goods to the US often end up holding US Treasury Bills as reserves., This consistent demand for dollars – and US Treasury Bills – helps keep the dollar strong, and interest rates and borrowing costs lower across the entire US economy.
Just as there’s a political angle behind US trade policies, the same is true for the countries that rely on export-led growth. Their domestic priorities and political realities mean they’re unlikely to simply adjust their policies to suit the US. As Wall Street Journal columnist Holman W. Jenkins puts it:
“What Mr. Trump definitely doesn’t understand: As in war itself, countries will sometimes endure and even subject themselves to surprising amounts of punishment to protect these arrangements, which means the trade war he’s inviting could be a lot more damaging to the U.S. than he anticipates.”
Below are extracts from recent articles and newsletters, to provide some perspective into what the world is thinking.
We’ve also included some of our thoughts.
Gavekal Daily, 3 April 2025: To bargain or not to bargain, that is the question
“China’s likely response therefore will be to make some modest retaliatory moves, increase support for domestic demand, and focus on improving its industrial competitiveness, rather than entering into fruitless negotiations with Trump. Its gamble will be that it can boost its long-run economic strength while the US is busy undermining itself through tariff hikes that will lead to stagflation if not outright recession. Europe, which faces a lower 20% reciprocal tariff and has even more room than China for domestic reflation, will make a similar calculation. The short-run cost will be high, but both Beijing and Brussels will probably conclude that they have little to gain by bargaining with Trump.”
We’ve already seen this playing out in recent days.
JP Morgan’s global economy team, 3 April 2025: There will be blood
“At a basic level a tariff is a tax increase on US household and business purchase of imported goods. This week’s announcement comes on the heels of earlier tariff increases to raise the US average tax rate by roughly 22%-pts to an estimated 24%.”
This equates to roughly an extra 2.4% of GDP.
“This represents the largest tax hike since WWII (the Revenue Act of 1968 at 2.6% of GDP). In terms of tariffs, the latest actions lift the average tariff rate to higher than even those seen during the Smoot-Hawley Tariff of 1930 that many economists argue played a key role in exacerbating the Great Depression.”
“A US/global recession is not a foregone conclusion. Beyond the obvious point that policy actions may be changed in the coming weeks, we continue to emphasize that the US and global expansions stand on solid ground and should be able to withstand a modest-sized shock”,
but
“….while we maintain that healthy household and corporate balance sheets are a key ingredient to the resilience of the cycle in recent years, large asset price corrections risk unearthing unforeseen areas of vulnerabilities”
Trump’s new tariffs take America back to the 19th century – to an older style of trade policy. They have been calculated using a formula that treats every bilateral trade deficit as unfair. And much of the President’s reasoning to justify his measures has been criticised by economists as misleading or overly simplistic.
The Economist, 3 April 2025: President Trump’s mindless tariffs will cause economic havoc but the rest of the world can limit the damage
“[US] Consumers will pay more and have less choice. Raising the price of parts for America’s manufacturers while relieving them of the discipline of foreign competition will make them flabby. As stock market futures tumbled, shares in Nike, which has factories in Vietnam (tariff: 46%) fell by 7%. Does Mr Trump really think Americans would be better off if only they sewed their own running shoes?”
“Under Mr Trump’s foolish policies, US consumers will pay more, and have less choice. Its savers will suffer from a slump in markets. Its workers will be hit by slower growth. And, spared the discipline of foreign competition, its companies will fall behind”
Renowned financial expert, John Mauldin (in his weekly communication) included the 3 April 2025 tweet below.
Source: X
The above extracts certainly highlight that the risk of a recession has been significantly increased. An additional concern is that sustained restrictive trade policies and reduced immigration may impose lasting supply costs that will lower US growth over the long run.
The new world will likely see increased inefficiencies, higher costs of goods and reduced demands with demand for wage/salary increases to match.
Market downturns have felt chaotic before but historically there has always been a recovery.
Some investors may be wondering whether it’s time to sell, because the market is in a panic and things feel chaotic. Will we ever recover fully from this? The truth is, every market downturn in history has felt bad. Think back to the COVID-19 crash. It felt completely unprecedented. And the effect of that crash was much more widespread than this one. This impacts some countries and sectors less than others.
Risks have increased, but it should be a lot easier to navigate Trump’s tariff war than the COVID-19 measures that shut down entire economies.
In the global financial crisis of 2008, markets fell close to 60% over 12 months. In Q1 2020, when COVID-19 struck, we saw an almost 40% correction. But 2008 was exceptional in terms of the excessive leverage that had built up in the bank and private sector – leading to big names like Bear Sterns, Lehman’s Brothers being shut down and AIG, Bank of America, Goldman Sachs, Wachovia and Washington Mutual needing capital or to be rescued. By 2020 we had new regulations in place and the bank and insurance sector came through the shut-down well… but still markets first fell precipitously. Fast forward to 2025, looking at banks specifically, loan books are the cleanest they’ve ever been, and capital and reserve levels are the highest ever.
Important point to note: The US market bottomed on 27 March 2020 before the shutdowns were enacted and, as in 2008/9, subsequently rebounded to end higher.
So, what will happen now?
The most likely immediate effect of the increased uncertainty is:
- a delay in capital allocation and spending,
- lower growth,
- higher inflation (if tariffs remain in place), and
- whilst interest rate cuts could initially be postponed, a series of cuts is likely if a recession unfolds.
At a time like this, we believe three things matter when it comes to investing.
- A focus on fundamentals.
It’s impossible to know whether markets will bounce this week, this month or even this year. There are just too many variables at play.
Experience has taught us that the answer does not lie in trying to forecast the economic variables but rather to focus on what we do know. We focus on investing in quality businesses with good management teams and only when the business is attractively priced relative to its long-term return potential will we invest… and we’re in good company there. Using the same approach, Berkshire Hathaway’s Warren Buffett and Charlie Munger outperformed the S&P 500 by 10% per annum over 60 years.
Recessions and negative macro events differentiate the good from the bad – both in terms of managements of companies and countries. Good teams come through bad times well, and stronger.
- Low prices provide buying opportunities.
Generally, if you make an investment when a stock is expensively valued you take on the risk of a de-rating when management disappoints or the environment changes. If you invest in a good quality company when the valuation is low, you only take the risk of the management team disappointing. And then, if the environment (or the management of the company) turns out better than expected, you benefit from higher earnings than expected as well as a re-rating.
Howard Marks highlights in his book, ‘The Most Important Thing,’ that many investors react negatively to price falls rather than realising that as prices fall, risk is reduced.
At Denker Capital we try and find undiscovered winners or companies that are mispriced. Just as good management teams adjust to changes happening in their worlds, we look for opportunities to invest in good quality companies at good prices.
- Distance emotions and remain rational.
It may be tempting to say this time is different, but over the past 100+ years stock markets have survived much worse, including two world wars, a great depression, a global financial crisis and the COVID-19 pandemic.
In conclusion: Bear in mind that whilst the market has sold down shares almost indiscriminately, not all companies (or countries) are affected by tariffs in the same way, and some not at all. There are also suggestions that the tariff announcements are part of a wider plan to rebase the US economy.
Warren Buffett has often said ’never bet against America’, based on the culture ingrained in the system of rewarding innovation and competition. Do the Trump policies undermine that, or will they enhance it?
We can be certain that uncertainty is likely to persist in the short term for some time. Unfortunately, at times like this we do see some investors withdrawing when they let their fears dominate rationality. However, for long-term investors this is a wonderful opportunity to invest wisely as prices fall and when markets are driven by emotions.
Focus on what you know, rather than on what you don’t.
Warren Buffett warns that forecasts tell you more about the forecaster than the future – because nobody can predict the future. Be careful to base your decisions on forecasts and be careful of what you read and how you interpret it.
In line with this advice, it is much better to use your time to select good companies – in line with your, or your investment manager’s, philosophy and process – rather than to try forecast economic variables. Besides, no matter how much time you spend forecasting economic outcomes, you will almost certainly be wrong most of the time.
