April Wrap Up - A new market paradigm?

Liberation day, when President Donald Trump outlined his comprehensive plan to tariff imports from almost every trading partner of the United States, reverberated around the world. Share markets fell, the US Dollar cratered and treasury yields, the interest rate on US government debt, rose sharply. It was this rapid rise in rates that seemed to force Donald Trump’s hand. By month end he had paused implementation of the tariff plan leading to a sharp rebound in share prices and a fall in US interest rates. Despite the pause, and market speculation that the eventual tariff level will be much lower than those initially announced, it’s hard not to feel that this signals a change in the World order. This will have implications for managing your money. 

On 2 April 2025 US President Donald Trump, in a now famous Liberation Day speech, outlined a sweeping tariff regime on US imports. While tariffs had been part of the election campaign the size and breadth of the program caught the market flatfooted. 

US and global shares fell sharply. The US S&P 500, for instance, plunged over 12% in the days that followed.  The market’s fear gauge, the VIX index, which measures prospective volatility priced into the option market, spiked to historically high levels, reflecting extreme anxiety and uncertainty among investors. The initial plunge after Liberation Day was among the most severe and rapid in modern market history.  It was a violent sell off. 

The share market wasn’t alone in its outsized reaction to the Liberation Day news. In early April US interest rates rose sharply with the 10-year treasury yield up from below 4% to as high as 4.5%, one of the largest weekly moves in recent memory.

At the same time the US dollar came under intense pressure as investors retreated from US assets and repatriated capital to home markets. Over the period from 2 April to its low point intramonth, the DXY Index, which measures US dollar performance against a basket of currencies, fell by 5.3%. This is a dramatic fall for the world’s reserve currency. 

It turns out that even the president has a boss. Rising interest rates are a major concern for an indebted country like the United States.  While understanding the precise thinking of the President is a dark art, spiking rates and dislocations in the money markets seemingly forced the President’s hand. On 9 April President Trump announced a 90 day pause in applying the “reciprocal” element of the tariff regime for all countries, except, notably, for China where tariffs were increased to 125%. 

Market participants immediately concluded that the final tariff package, when announced, will be significantly watered down. Panic averted. Maybe. Risk assets rallied sharply, and long-term interest rates fell. By month end the S&P 500 index had recovered, ending the month down a “mere” 0.8%. US treasury yields were some 0.2% off intramonth highs.

While market participants seem to have shrugged off their initial fears of the US tariff regime, risk remains. The echoes of this can be seen, in our view, in the elevated gold price and the US dollar, which despite a small bounce near month end, remains 9.2% off its highs as measured by the DXY index. This is the exact opposite that economic theorists would expect on the imposition of a tariff; theory points to a stronger not weaker currency on the country imposing the tariff. Something strange is going on.

The evidence of a paradigm shift away from the idea of US exceptionalism is growing. While we have touched on this in previous Wrap Ups, the Liberation Day speech and the market price action of a weaker US dollar, higher US treasury yields and a spike in gold - which typically reflects investors’ risk perceptions - all point to the market increasingly recognising this.

It’s complicated. Most investors have matured in a world built on US exceptionalism. This had clear lines of sight for us to follow. In this world, US companies were globally dominant, benefiting from expanding markets as economies developed and enjoying lower costs as they outsourced manufacturing. So that was a buy US shares story. The US dollar was strong and provided a safety valve for trading economies to improve competitiveness. That was a buy US dollars story. Inflation was well contained and generally falling. That was a buy US bonds story. 

This investment narrative has been fraying at the edges for some time. Liberation Day was another nail in its coffin. In its place we are entering a multi polar world, where other regions and countries are gaining relative power, catching up with the US in both economic and geopolitical significance. 

This multi polar world is likely to be characterised by a wind back in openness and a pivot towards protectionism. It may mean a realignment of trade patterns and potentially require significant new capital investment, not just in manufacturing but also in defense.

It alters the economic and investment landscape. There are three ways we are responding:

1. Diversification – we talked about this in last month’s commentary, but the paradigm shift we have outlined places more importance on building well diversified portfolios. Diversification both plays into the idea of a multipolar world, the US won’t be the only investment destination in town as it has been, but also helps manage risk given the uncertainties that exist as the world reorients itself.

2. Build mega trends into portfolios – the idea of mega trends is that there are structural trends or themes that will drive asset pricing over extended periods of time. In the more stable, US centric world that had existed these themes tended to be less important to achieving investment success. We are of the view that explicitly considering them as we build portfolios today will be central to delivering tomorrow’s investment outcomes.

3. Portfolios must be dynamic and able to respond to changing conditions – while there are strong reasons to believe that we are entering a new investment paradigm, exactly how this plays out is in many ways unknowable. Being able to respond and adapt your investment portfolio as new insights come to hand will be critical. Set and forget is not a winning strategy in a rapidly changing world.