After the significant stock market volatility experienced in April, driven largely by US President Trump’s “Liberation Day” tariffs, equity markets have since recovered across the board as trade tensions have eased somewhat. We also saw improving consumer sentiment and robust corporate earnings, which all helped drive positive equity market returns. More recently, however, we have seen renewed geopolitical instability, notably the outbreak of hostilities between Israel and Iran, which has weighed somewhat on the markets.
Equities: a mixed picture, stronger closer to home
Looking back, April certainly wasn’t short on market volatility as investors grappled with Trump’s erratic trade policies. It feels like a lifetime since Trump announced his “reciprocal” tariffs during his“Liberation Day” briefing on April 2nd. They triggered sharp stock market declines and a major spike in volatility across asset classes. Market sentiment improved after Trump announced he would pause tariffs for 90 days (initially, except for China). Markets began to recover much of their losses; however, despite this, economic data weakened over the period, with the US economy contracting 0.3% in Q1, and US consumer confidence fell to its lowest level since the COVID-19 outbreak.
As a consequence, nearly every region posted a negative equity return in April. The US was the worst-performing region, declining by -2.6%. This had a big knock-on effect on global equities (the US represents roughly 70% of the global market) and dragged down the global index by -1.4%. It’s worth noting that these returns were exacerbated by US dollar weakness as the pound appreciated 7.5% against the dollar.
In contrast, the UK demonstrated great resilience in the equity market downturn, slipping just -0.1% in April. And so, on a more positive note, Europe was an outlier with the European equity markets posting a small gain of 0.3% for the month. European markets benefited from economic stimulus, attractive relative valuations and a more benign inflation outlook.
In May, the US equity market staged a sharp rebound, delivering +5.5%, which was underpinned by a strong Q1 earnings season. Of the companies that reported, 77% exceeded earnings expectations. The euphoria was felt across the market cap spectrum, as small cap stocks rebounded, buoyed by proposed tax cuts and potential regulatory changes. Market sentiment was further lifted by Saudi Arabia’s Crown Prince Mohammed bin Salman’s pledge to invest $600bn in the US.
Trump’s “big, beautiful” tax bill passed the House of Representatives late May, and now awaits Senate approval ahead of the 4 July deadline. The bill will extend tax cuts from Trump’s first term, provide more money for defence spending and fund mass deportations. Contentions over the estimated $2.4tn it will add to US debt were largely responsible for Trump and Musk’s subsequent public fallout.
And after all these shenanigans, if we look at the US stock market on a year-to-date basis (to 18th June), the S&P500 is largely flat after a rollercoaster few months.
Closer to home – Europe and the UK hold up
US-EU trade negotiations and a temporary delay in planned tariff hikes alleviated fears of a global trade war, leading to European equity markets posting positive returns of over +4% in May, while the UK market rose +4.4%. A proposed 50% US tariff on EU imports was put on hold after the negotiation deadline was extended to 9 July. However, tensions linger – Trump’s 25% tariff proposal on non-US smartphones wiped $70bn off Apple’s value in a single day!
Year-to-date, UK and European equity markets have outperformed the US, with the FTSE 100 and EURO STOXX 50 up +8.5% and +6.5%, respectively.
Bonds and the trajectory for Central Bank interest rates
The Bank of England cut interest rates by 25bps to 4.25% in May, following the European Central Bank (ECB) rate cut in April, with the ECB cutting again in May. Central banks have felt confident in lowering borrowing costs as inflationary pressures have subsided to a degree, notwithstanding a recent small spike. UK Consumer confidence was better than expected, and in April, Starmer & Co. secured an “Economic Prosperity Deal” with the US and a new UK-EU post-Brexit deal.
Bonds experienced some raised volatility, driven by shifting trade policies, fiscal concerns and evolving expectations around inflation and monetary policy. Global government and UK government bonds sold off modestly in April. In the US, rising fiscal concerns over Trump’s bill, resulting in Moody’s downgrade of the US sovereign credit rating, triggered a sell-off, particularly in longer-dated bonds, pushing yields higher.
Whilst Bond markets therefore certainly weren’t immune to all the volatility, they did provide a decent counter in May to falling stock markets and generated gains over the period. The market’s initial reaction has been that tariffs will impact global growth, providing central banks with the ability to cut interest rates. As a result, markets are pricing in further interest rate cuts by the Fed, BoE and ECB. As mentioned above, we have seen cuts by the BoE and ECB this year, and as market interest rates fall, the price of those interest-bearing bonds, such as Gilts and Treasuries, rises.
With Congress needed to approve any major trade deal, there will be plenty more negotiations between the UK and US in the months ahead, but the major agreements so far include a significant cut to car tariffs, the scrapping of the steel and aluminium tariff and the UK’s removal of its 20% tariff on US beef. Negotiations between the US and China will continue during the current 90-day pause. The easing of tariffs has been welcomed by investors and arrived sooner than markets had expected.
Despite some fluctuations in the Bond market, Bonds have broadly continued their recovery as markets anticipate further cuts, albeit the likelihood of multiple cuts in the US this year seems to have faded a little.
As before, inflation remains a concern, but the income generated from Bonds is still appealing, especially as other asset classes typically experience more heightened volatility in the case of geopolitical issues.
Summary
Oil has surged following Israel’s strikes on Iran. The price of Brent Crude oil rose to over $78 a barrel following Israel’s attacks on Iranian nuclear sites, albeit it has eased a little since. A prolonged conflict between Israel and Iran is likely to have a significant impact on the global economy, more so if the conflict widens to involve Western states. We should remember that oil reached $100 a barrel shortly after Russia invaded Ukraine in February 2022; if it were to reach similar levels again, it would likely have a knock-on effect on supply chains and inflation, which could in turn make it harder for central banks to bring down interest rates further.
The outlook for the remainder of the year will continue to be dominated by geopolitics and the endgame for this most recent flashpoint. Here, and on the tariff front, Trump’s name will not be far from investors’ minds. By the end of early July, we should have a better idea of what rate many of Trump’s tariffs will settle on and what amendments the Senate will make to Trump’s tax bill.
In these challenging times, diversification remains the key. While market risks are real, so too are the opportunities for those who remain calm and focused.
Legal & Medical Portfolio Positioning
As mentioned in previous market updates, we use a huge range of economic data to assess the opportunity and risk in global markets. Our risk barometer continues to reflect the need for continuing with our more cautious outlook. Earlier in the year, we had already reduced our holdings in equities in all portfolios ahead of the main market unrest to dampen volatility and allocated more to Bonds to achieve this further.
We have since reviewed the market indicators and portfolios in June and are happy that we are underweight in risk assets and especially US equities. Whilst risk to the downside always remains, the portfolios are constructed to weather these risks whilst capturing the upside. Our portfolios continue to hold a good mix of different asset classes, taking a diversified approach to investing, to smooth the investment journey for investors.
- Equity holdings in the portfolios are designed to deliver long-term growth.
- Fixed income holdings focus on high-quality businesses that are close to maturity, which offer an attractive level of return and experience a lower level of risk.
- Alternatives, such as infrastructure and commodities, provide additional diversification benefits through the exposure to steady long-term cash flows, which reflect the effects of economic growth and inflation.
We will continue to provide quarterly updates on the markets and portfolio positioning. For a more personalised discussion on what this means for your investments and portfolio, please contact your Legal & Medical adviser.
This article should not be interpreted as specific advice. As always, we would urge you to contact one of our specialist advisers, who will look at your own circumstances before advising.