Where are we now, what happens next, and what's the plan?

It’s been a nasty start to the week, with the Australian share market tumbling at the open and at 1.15pm, it’s currently down 3.94%. Investors should strap in for a wild ride this week (and presumably for a while) as the world processes Trump’s tariffs and global leaders scramble on the next steps – for some, negotiation, for others, retaliation (see China).

It's hard to sift through the millions of news headlines so consider this your cheat-sheet as to what’s happened and what to expect – as well as some thoughts on what investors can do next (though sitting tight continues to be a big component).

Markets at a glance: 

• ASX 200 down circa 4% after being down 6%
• Shanghai down 6%
• Hang Seng down 10%
• The Australian dollar is at a five-year low, buying US60.14c
• Bitcoin down 5.6%
• WTI Crude Oil is down 2.55%
• Gold, silver and platinum spot prices are up, with silver the biggest gain.

Interesting notes

• The AAII sentiment survey (US) revealed 61.9% of participants are bearish — the third-highest reading ever, surpassed only by the bear market lows of October 1990 (67%) and March 2009 (70%).
• Just 6.8% of NYSE-listed stocks are above their 20-day moving averages, the lowest since September 2022, when markets bottomed out a month later.
• The S&P 500 VIX hit 45 on Friday. Historically, in the 12 instances since 1997 when it crossed that threshold, the S&P 500 averaged a 2.57% gain the next day (positive 75% of the time) and a 4.28% rise a week later (positive 83% of the time).
• CNN’s Fear and Greed Index plunged to 4, a rare single-digit reading signaling extreme fear on a scale from 0 (maximum fear) to 100 (maximum greed)
• The S&P/ASX 200 VIX Index (volatility index) is at 26.6, representing high volatility.

What the experts think

• Bill Ackman, Pershing Square Capital Management, requested a 90-day time-out from tariffs to allow for renegotiations, arguing that otherwise, the tariffs effectively launch an “economic nuclear winter”.
• Warren Buffett, Berkshire Hathaway, was forced to deny videos endorsing tariffs, advising he would discuss further in the upcoming shareholder meetings. He did previously say in a CBS News interview his view that tariffs are “an act of war to some degree”.
• Stanley Druckenmiller posted opposition to tariffs exceeding 10% on X over the weekend. He believes if tariffs stay in the 10%, the risks are low and he views them as being like a ‘consumption tax’.
• Ray Dalio, Bridgewater Associates, hasn’t specifically endorsed or condemned the tariffs but made the following comments:
• Tariffs can reduce foreign reliance so can help prepare the US for times of international power struggles. He believes we are moving into a high risk era.
• The Federal debt-to-GDP ratio is about 120% and must come down in some way. The US financial system can’t cope with it and there are varying views on the impact of trade tariffs to the federal deficit.
• Howard Marks, Oaktree Capital, describes the tariffs as the US moving towards isolationism and the biggest change in the market environment he’s seen across his career. He believes the enormous growth in share markets over the past 80 years can be largely credited to globalisation and trading partnerships.

The theories behind why Trump introduced tariffs

My basic interpretation of Trump’s tariffs, based on his own words, is that he wants to encourage a return to American manufacturing and production and to have better trade deals favouring the US.

Without going into the concerns about how tariffs can make a lot of people worse off, there are a range of additional explanations for why Trump may have implemented them.

Livewire’s Carl Capolingua positions that it could be about forcing a complete reset of global supply chains, incentivising US innovation and be used to increase sovereign leverage. You can read more here.

Another theory posits that this is a deliberate action to manage US debt by lowering the debt-to-GDP ratio – i.e. tank markets, cause a recession, force the Fed to cut rates and then the US can renegotiate its debt terms at more favourable costs.

Centennial Asset Management’s Matthew Kidman also reminds investors that Trump “loves a good deal” and perhaps this is a tactic to force countries to the table to negotiate better terms for trade with the US that can then be positively displayed in the media. There is commentary coming out the White House that as many as 50 countries have reached out regarding trade negotiations and, according to Trump, some world leaders are "dying to do a deal". 

The chances of a recession and what to expect this week

After starting the year fairly bullish, the odds of a recession have certainly increased across the board.

• JP Morgan positioned the odds of US and global recession at 60% (up from 40%)
• Goldman Sachs raised the probability of a US recession to 35% from 20%
• HSBC suggested equity markets have priced in a 40% chance of recession by the end of the year.

Kidman expects a ‘dead cat bounce’ this week.

“We’ll get a couple of days where everyone takes a deep breath, and we have a bounce. Then we walk into the US company earnings season, and they are going to be reading off a sombre outlook. The bounce will be short and sharp,” he says.

He believes there are two key scenarios to watch for.

1. The Bull Case: A quick resolution where countries return to the negotiating table and this also provides cover for the US Federal Reserve to cut rates. If the US is also able to implement planned tax cuts this would further support a better market as the year unfolds.
2. The Bear Case: Negotiations and resolution drag on. As Kidman highlights, the Chinese government has elected for a retaliatory approach. Countries will need to choose between negotiation and retaliation, and the longer the process takes, the greater the prospect of severe damage and recession. Kidman cautions that Canada, as a key partner, will not re-negotiate until after its elections, so there is unlikely to be a resolution there for around two months.

“My suspicion is if we’re sitting here in two months without much movement on the tariff front, you are going to see a recession. It could slip quite quickly. The market is pricing in a mild recession with a quick fix currently,” Kidman says.

The key signals investors should watch for before taking any action

Kidman suggests that investors sit tight – the market is too uncertain at the moment for any clear path. The signals he is watching for include:

• Negotiations on tariffs, particularly between key countries: Canada, the European Union, Japan, Mexico and possibly India.
• Changes in the US Federal Reserve rhetoric where it starts to favour a rate cut.
• Tax cuts in the US.

Kidman's portfolios are currently 50% cash, and he started selling in February. He wouldn’t go further into cash and is waiting on more clarification on what is happening next before he heads back into the market (aka the signals above).

As a comparison, Marcus Padley of Marcus Today has a 100% cash position (and 83% cash in its growth portfolio) and believes “we are approaching a fantastic buying opportunity”. He is waiting for earnings downgrades to start to click in.

The Wilson Asset Management team downweighted or sold positions they expected to be hit by tariffs from late last year. They have viewed the volatility as a buying opportunity for businesses with strong fundamentals that they’ve liked for some time.

What to buy when the time is right…

Kidman suggests that what to buy will depend on which scenario plays out in the market.

“Cash is the easier and more reliable place to go at the moment. It’s a hard scenario for shorters. Depending on the scenario, you can start to pick over what’s fallen and what you want to buy, but you need clarity on whether we’re in for a mild recession or a much harsher one that lasts longer,” he says.

In the case of a milder recession, Kidman favours the tech sector in terms of services, noting it has been hit more by sentiment because it is expensive rather than tariffs. He also suggests watching case-by-case trade deals by countries.

“If China, for example, negotiated a good deal, then look at companies like Breville, which manufacture in China and then go into the US,” Kidman says.

In the case of a more severe recession, he advocates domestically aligned sectors like banks and property – and stay away from resources.

“Resources are a global growth story. If we have a protracted recession, you will need to be careful about this and you’ll want to be focused on more domestically aligned Australian-based companies,” he says.

In short, sit tight and wait for the right signals. It's going to be choppy either way - let me know in the comments how you are approaching the market.