Fri, 03/07/2025 - 08:26
After a long period of steady growth, it's been something of a rollercoaster ride for US and global stocks of late. Following Trump's inauguration, the S&P 500 and the Nasdaq 100 hit new all-time highs of $6,144 and $22,175, respectively, in early February. Yet, as of 6 March, just a month later, both have wiped out a full quarter's worth of gains and now sit within touching distance of the levels they were at on 5 November 2024, US election night 2024, down almost 2% YTD. What is behind this sudden volatility, and how can investors protect themselves going forward?
The uncertain global economic situation with bumper bilateral tariffs between the US and several other countries, as well as growing disruptions to major trade routes around the world, are obviously bad for business and investor confidence. However, the targets of Trump's tariffs — China, in particular — ironically appear to be weathering the storm much better than the US. Could we be on the precipice of a tectonic shift in investment habits, and what will this mean for US and Chinese stocks in the medium term?
A changing world
The US has now launched hefty tariffs on three countries: Canada (25%), Mexico (25%) and China (20%). However, at least in the short term, US-based consumers and corporate buyers will suffer the most as a result of higher prices. In the longer term, the logic is that new domestic producers will spring up and replace the supply of imported goods, but this will take time. Furthermore, having already alienated its largest trading partner in the EU with public criticism over military spending, the US could see this move backfire spectacularly by bringing China and Europe closer together. At the very least, US defence contractors will be hit hard as the EU begins to ramp up production of its own military hardware in lieu of NATO dominance.
Indeed, it appears that Chinese stocks are less concerned with the impact of the tariffs, as the China A50 has gained more than 10% since November 2024, and Hong Kong tech stocks have surged up to 30% (HSTECH.HK), while US indices are by contrast flat. Even Europe's EURO STOXX 50 index is up almost 9% YTD. And while the impact on China of Trump's tariffs will ultimately be felt, the Asian powerhouse's strong cost-to-quality coefficient will mean that its products remain attractive to US customers, while its potential market in the emerging world will only continue to grow.
Home is where the heart is
It's no secret that the US Federal Reserve is adopting a "wait-and-see" approach to monetary policy for the moment. Despite the expectation (and need) for rate cuts, the CME's FedWatch tool doesn't think we'll see any for at least three more months. This, coupled with the weaker dollar, is not likely to help a US equities recovery. While the US continues to launch self-harming economic sanctions, other economies are taking a much more proactive approach to respond to the challenges they are facing. China, for example, announced plans to issue 1.3 trillion yuan ($179 billion) in ultra-long special treasury bonds in 2025 (up from 1 trillion yuan in 2024), while local governments will be allowed to issue 4.4 trillion yuan in special debt (up from 3.9 trillion). Premier Li Qiang warned that "changes unseen in a century are unfolding across the world at a faster pace", and these measures would help the country to achieve its >5% growth target. This is all part of China's shift to a more domestic-led, consumer-driven growth model that will be more sustainable in the long run and insulate its companies from geopolitical uncertainty.
Meanwhile, the EU has already prepared for a €1.2 trillion fiscal bazooka to help it recover from the economic impacts of COVID and ongoing conflict in the region while also funding the green transition. Spain is now leading a campaign to increase the budget to €2 trillion by initiating joint financial liability across the EU27, which would give the bloc the economic clout to enter into partnerships with China on a more equal footing. Closer ties between the knowledge-rich EU and industrially unrivalled China would surely bring real growth to both parties, boosting stocks in the process.
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