Investors breathe again after a wild ride

After a rocky week, as investors struggled to price in erratic US trade and tariff policy, markets seem to have regained their poise. Shares pushed higher all around the world on Monday after scoring a technical bear market - a fall of more than 20% from the latest peak - at last week’s low point.

Investors are becoming more used to equity market volatility. The latest fall follows similar 20%+ declines in 2018, 2020 and 2022. These sharp falls every couple of years before and after the pandemic are a reminder that the long-term outperformance of shares comes at a price. Investors have to hold their nerve through big market gyrations if they are to benefit from the higher growth of shares versus safer assets like bonds and cash.

Arguably, stock markets are not the main story this week, however. Attention is focused on historically big moves in bond and currency markets, too, as investors start to weigh up a possible end to so-called US exceptionalism. Unpredictable US policy is forcing a reassessment of America’s role as an anchor for the world’s financial markets.

The pendulum swing of US policy was in full evidence last week as US President Trump seemed to listen to the message being sent to the White House by the bond market. Shares soared on Wednesday after a 90-day postponement of swingeing trade tariffs suggested that Trump remains focused on the market reaction to his radical bid to reshape the global trade landscape.

But a near 10% rise in the S&P 500 was a short-lived reprieve. Shares fell heavily on Thursday as China retaliated in kind to the imposition of sky-high tariffs. Then they rallied hard again on Friday as Trump rowed back on the levies to be applied on key technology imports like smartphones and laptops. It has been hard to keep up.

The disconnect between rising bond yields and the prospect of lower interest rates is an echo of the turbulence in the UK gilt market after former UK Prime Minister Liz Truss’ mini-budget in 2022, further evidence that so-called ‘bond vigilantes’ can focus the minds of politicians. The Bank of England was forced to step in then to stabilise the UK bond market and there is speculation that the US Federal Reserve stands ready to do the same in the US if necessary.

Market jitters

In another sign of investor nervousness, the gold price continued to rally last week, hitting a new all-time high of US$3,245 an ounce. That is around twice the level it traded at as recently as 2022. Gold is seen as a safe haven during times of geo-political and financial uncertainty and attracts buyers when the outlook is unclear, despite its lack of income.

Finally, investor concerns are evident in a re-pricing of corporate bonds where investors are demanding a higher income to compensate them for the added risk of lending to businesses (which can and do sometimes go bust) rather than governments (which have the luxury of being able to print money to meet their obligations). Higher corporate bond spreads are a classic sign of anxiety about the health of the economy.

Where next for the long bull market?

A bigger question than the short-term ups and downs of share and bond prices, is whether the 16-year bull run since the financial crisis is running out of steam. The pattern of the latest long run up in share prices is reminiscent of the two long post war bull markets from the 1950s to 1960s and again in the final two decades of the 20th century. In both cases the bull ground to a halt after about 18 years.

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Please note that the views expressed in this article are my own.