Written by: Alex Da Costa
“It’s déjà vu all over again”
This wonderful quote from the legendary baseball sage Yogi Berra springs to mind as we reflect on the past few months. While the current tariff “war” is unprecedented, this is certainly not the first time we have seen a sudden shock to markets quickly reversed, confounding many financial experts along the way. Back in April, many would have reasonably expected a shock of this size would lead to a sustained period of economic and market stress and yet by many measures, things seem okay. Stock markets have been on a tear, setting multiple new all-time highs while bond yields have been largely unchanged. Growth, which many expected to slow, actually rose while inflation remains largely unchanged. Employment appeared robust until the July US Payrolls data was released data on August 1. This data showed some signs of weakness (and led to the swift firing of the head of the US Bureau of Labor Statistics). Stock markets sold off on the day of the news but rebounded quickly and are almost back to all-time highs at the time of writing on August 11.
This apparent divergence between geopolitical turmoil and market strength has left many asking: is this resilience sustainable, or is the market ignoring a gathering storm? Time will tell but for those feeling gloomy about the outlook, it would be wise to remember that while the tariff war is unlikely to be a net positive for the US or its trading partners, markets are starting to see a vague outline of where tariff policy will ultimately settle. Markets abhor uncertainly so increased clarity around this is welcome. There have also been a number of positive developments. In the US, maybe the most significant of these was the passage of the “One Big Beautiful Bill” on July 4th, a monumental piece of legislation combining the largest tax cuts in recent history with significant federal spending and deregulation. Buried in the 1000+ page draft of the bill was Section 899 which had the potential to significantly negatively impact global capital flows. Investors spent much time speculating on what it could mean but markets almost didn’t notice. Was that a callous disregard for risk or was it the market correctly foreseeing that section 899 would ultimately be scrapped from the final bill? This makes the following point well: Ignoring the collective wisdom of the market, which is heavily influenced by many very smart people, is dangerous.
Investors will be keenly watching the data unfold over the coming months, not least of all the August US Payrolls data due to be released on September 5th. There will be bumps along the way, as there always are, but it will be cooler heads who stay focused on the longer term who will prevail. Economies and markets and the linkages between them have become increasingly complex, defying simplistic analysis. This does not mean investors should be complacent but as we have just witnessed in dramatic fashion, overreacting to short-term news can be damaging to one’s financial well-being. Uncertainty is a defining feature of life and markets. Humility and resilience are essential attributes for success in both.
In our Asset Class Outlook, which is only available to Prime Quadrant clients, we share our thoughts on the investment landscape.
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