Market Update: Navigating volatility and economic shifts
The start of 2025 has been marked by significant volatility in global markets, driven by President Trump’s trade tariffs, geopolitical tensions, and central bank decisions. Here’s an overview of the key developments:
US tariffs and trade uncertainty
As pledged during his election campaign, President Trump has imposed substantial tariffs on imports from neighbouring countries, including Canada and Mexico, as well as strategic competitors like China. These tariffs have raised concerns about a global trade war and its potential to slow economic growth or even trigger a recession. The unpredictability of retaliatory measures and their effects on inflation and market sentiment remain major challenges.
Geopolitical tensions escalate
Geopolitical uncertainty continues to rise, with global powers reshaping economic and diplomatic alliances. The US has intensified its pressure on Ukraine to negotiate financial concessions, while China is rapidly expanding its influence in artificial intelligence (such as DeepSeek) and export markets, particularly electric vehicles. Meanwhile, Europe has announced an urgent need to boost military spending. Investors are watching closely to assess how these shifts could disrupt global economic stability.
Central bank decisions and inflation concerns
After years of battling inflation, which was largely felt to have been won, central banks are now shifting their focus to the potential economic fallout from tariffs and increased government spending.
- Federal Reserve: The Fed has maintained a cautious stance, opting to delay interest rate changes until more economic clarity emerges.
- European Central Bank (ECB): Despite implementing a 0.25% rate cut, the ECB has acknowledged that this measure is insufficient to weaken the Euro or step change an increase in demand. Instead, they have revised their growth outlook downward.
Market reactions: Sharp declines in equities
January and early February saw strong market performance, but sentiment turned sharply negative in late February as economic concerns deepened.
The Dow Jones Industrial Average dropped 2%, the S&P 500 declined 2.7%, and the tech-heavy Nasdaq fell 4% in a single day in March as fears of a “Trumpcession” grew.
Currency movements: USD weakens, Euro strengthens
Currency markets have mirrored the uncertainty in equities:
- The US dollar has weakened to its lowest level since November 2024, driven by concerns over trade policy instability and ever increasing government debt levels.
- The Euro has strengthened to its highest level since the US election, bolstered by European fiscal measures and a declining USD.
Outlook for 2025
Looking ahead, key factors likely to shape the markets include:
- Trade negotiations: Any progress or setbacks in resolving trade disputes will have significant market implications.
- Inflation risks: The potential return of inflation and aggressive central bank responses, including interest rate hikes, could impact investor sentiment.
- Recession fears: Markets will react swiftly to economic data that signals a possible recession, especially in the three massive markets of the US, China and euro-zone.
What should investors do?
Market volatility often tempts investors to react impulsively, but history shows that staying invested through turbulent times will usually yield better long-term results. Selling in a downturn locks in losses so risking missing out on eventual recoveries.
Investors should take the opportunity to review their portfolios and ensure they are well-diversified. Consulting with your financial adviser can provide clarity on risk exposure and long-term strategies.
One way to view market volatility is as a transfer of wealth from impatient investors to patient ones. Depending on your individual circumstances, staying invested and maintaining a disciplined approach generally remains the best course of action in uncertain times.
The information contained in this publication is intended for general guidance and information only. It has not been personally prepared for you. Therefore, you should not act on this information if you have not considered the appropriateness of this information to your personal objectives, financial situation and needs. You should consult with us before making any investment decision. Historical market performance may not be indicative of future market performance.