Increased volatility in the stock market: what do you do with it as an investor?
'Liberation Day'... That is the term President Trump used on 2 April 2025 to mark the day he announced new import tariffs. It is seen as the beginning of a trade war with economic consequences worldwide. It has already led to major stock market swings in recent weeks. Mark Van Assche, account manager Private Banking and Wealth Office, talks about it with Baptiste Mesot, portfolio manager at KBC Asset Management.
06/05/2025
Economy
- The American consumer is pivotal to the US economy. The trade war is creating a huge amount of uncertainty, With a temporary truce being declared (including with China), an escalation seems to have been avoided but consumers still face import duties that are more than five times higher than at the start of the year. Our economists expect growth to be meagre in the second half of the year. Growth in the first quarter contracted as a result of high import figures.
- In Europe, additional public spending on defence and infrastructure appears to be bolstering optimism about growth in the medium term, whereas the launch of import tariffs on European products in the US will have an immediate and negative impact.
Commodity prices - inflation
- For the time being, inflation rates are continuing to move in the right direction, thanks in part to lower oil and gas prices. Even so, inflation worldwide – but especially in the US – will increase again due to Trump’s policies (as a result of planned import tariffs and the impact of stricter migration policies on the labour market).
- However, the speed at which higher tariffs will translate into rising inflation remains uncertain, though US inflation expectations for the next 12 months have increased significantly.
Fiscal and monetary policy
- The US government seems determined to reduce the budget deficit, including by means of cost savings in government (DOGE). The question is whether the promised tax cuts can bring relief.
- China continues to regularly support its flagging economy through new policy decisions.
- In the euro area, the major investments announced for defence and infrastructure are gradually taking more concrete shape, although it looks like their impact won’t be felt until 2026-27.
- In April, the ECB cut its key rate by another 25 basis points. We expect that the Fed, too, will ease its key rate later this year when growth is forecast to slow down sharply. Temporarily higher inflation due to the announced import tariffs is preventing it from being reduced in the short term. The ECB is more comfortable on this front and we now expect two more rate cuts (possibly in June and September).
Bond markets
- Bond markets are also reeling from the trade war and are anticipating an adverse impact on economic growth and (expected) further cuts in key rates. As a result, yields are falling on sovereign bonds.
- This is largely offsetting the increase in German interest rates at the start of this year.
- US interest rates are falling less sharply for now, as the uncertainty surrounding US debt has increased.
Stock markets
- Taking a 90-day pause before the high import tariffs of ‘Liberation Day’ take effect has given stock markets some breathing space, especially now that a similar agreement has also been reached with China.
- Company results that clocked up better-than-expected earnings growth of 10% in the US and limited the damage to -5% in Europe have also supported sentiment. However, another feature of the results season was that many companies downgraded their forecasts or even stopped publishing them given the high level of uncertainty. Analysts are still adjusting their projections for earnings growth downwards although the pace has slowed slightly.
Risks
- The conflict in the Middle East and Ukraine could continue to cause nervousness. As far as what will happen to the aid to Ukraine, Border disputes are also on the rise between India and Pakistan.
- Moreover, support for the German government seems limited, which may affect planned spending.
- Lastly, Chinese AI technology may throw a spanner in the works due to the fact that DeepSeek has achieved impressive results at a fraction of what it costs in the West.
Agreement on tariff negotiations with China puts the trade war on hold and gives stock markets confidence. Pending the outcome of the talks, we are adopting a neutral stance on shares again, but remain vigilant about the impact on the global economy of import duties already in place
Siegfried top, Senior Investment Strategist KBC Asset Management
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