Walking a Tightrope

One of the potential thoughts behind Trump’s plan is to reduce the value of the US dollar, which in turn will make domestic manufacturing more competitive on the global scale, whilst at the same time adding tariffs (revenue) to all that is imported. In isolation that will increase revenue and reduce the government debt, though the challenge is the other side of the impact, which is likely to be lower economic growth and therefore tax revenue. On the surface it sounds like a cunning plan, but in practice there are significant challenges!

Trump’s approach to this process has been to jump in with both feet, announcing high tariffs at short notice, then changing his mind by pausing for 90 days on most, and an escalation with China. Investment markets understandably are forgiven for not knowing which way to turn.

Now here’s the dilemma. Trump’s problem is that if he wants lower taxes and lower mortgage rates for America, he needs lower inflation to lead to lower interest rates. However, tariffs are naturally inflationary (as they increase the cost of imports) in turn making it harder for the Central Bank to cut interest rates. Investors can kind of see what he is wanting to achieve, but don’t think the actions (or execution of those actions!) will drive the right end result. As a result markets and policymakers are pushing one way as Trump’s pushes the other. The tightrope is a bit wobbly now to say the least…

In response on Easter Monday, Trump lambasted the Chairman of the Federal Reserve, Jerome Powell, demanding lower interest rates and declaring that he would remove him from office. Investment markets sold off further on the news and caused Trump to recalibrate again. He has withdrawn his stance on Powell, and softened his tariff talk still further. This is what has caused a more positive market environment this week, as the short term risks of the worst case scenario subside.

Where this will all end, nobody truly knows, though we remain cautious. The graph below shows the protection afforded by our Low Risk Portfolio compared to the sell off in US equities. Our fixed income bucket which makes up circa 60% of this portfolio is up around 2% year to date, and the portfolio overall sits in positive territory over the same period despite the significant sell off in global stocks.

Of course, our higher risk portfolios are down a bit further, but still by much less than the market. The protection across the whole range has been pleasing and will set us up well for when this has fully blown over.

If we get a more collaborative approach by leaders and policy makers, then we would expect tariff talk to effect markets less and less from here. That said, the collaboration is not yet a given, and we remain cautious on equities in the near term, on the basis that the damage done to the wider economy through tariff uncertainty, will slow global growth further. As can be seen close to home in the UK, through March’s record level of government borrowing, it is likely that Reeves will have to cut investment and/or increase taxes further in the October budget. Given this likely trajectory we expect interest rates to be lowered in May, and markets to begin to price for more cuts over the remainder of the year than is currently being priced in. If we did see some more positive discussions leading to trade deals in the short term, then that would a reason to be more optimistic, though we are not there yet. Either way, given our protection so far on the downside, we feel we are well positioned for the pathways ahead.

On a separate, though connected note, as a business we are very keen on effective communication, collaboration and trusted relationships. We strive for better outcomes through collective thinking in support of clear objectives. Our clients and their families are at the centre of what we do, and as always, your feedback is so valuable in helping us develop our services and solutions.

With this in mind, we will be repositioning our brand over the summer months. It is nearly 3 years since the start of our project with Amber River, and we are looking forward to further enhancing the benefits of our combined scale, by bringing the Amber River and DB Wood brands together. Our underlying plan does not change, and remains to positively drive costs and performance, whilst improving the quality of our expertise to enhance our client relationships and touch points over the years ahead. As our colleague Rhiannon Brooks knows only too well, life is a marathon not a sprint, and on that note we all wish her the best of luck in running the London Marathon this weekend, another excellent fund-raising effort.

Till next time, let’s hope Donald manages to walk his tightrope….