“The only way this problem can be cured is with Tariffs, which are now bringing tens of billions of dollars into the USA. They are already in effect, and a beautiful thing to behold.” – Donald Trump, US President
“When those with the most knowledge and the largest platforms subordinate truth to political alignment, they don’t just make a tactical error. They commit an epistemic crime.” – Mike Brock, author, philosopher, and former executive.
Introduction
One day earlier, and it could have been taken for an April Fool’s Day joke. On 2 April, US President Donald Trump unveiled a sweeping tariff strategy during his “Liberation Day” address – an event that many analysts and investment professionals (including Dynasty) had hoped would deliver a more measured approach than markets had feared. Those hopes were swiftly dashed.
In what is seen as the most aggressive tariff action since the 1930 Smoot-Hawley Tariff Act – policy widely regarded as one of the contributors to the Great Depression – Trump announced a broad and punitive series of trade duties, reversing the trend of global trade. The magnitude of the measures stunned markets and analysts alike.
J.P. Morgan, among others, was forced to revise its economic growth forecasts sharply downward, stating that the scale of the tariffs represented a significant macroeconomic shock. The bank now places the probability of a global recession at 60% should these policies remain in place.
The market response was swift and severe. Within just 48 hours, US equities lost $5.4 trillion in value, marking the fourth-largest two-day market decline since World War II, trailing only the 1987 crash, the 2008 financial crisis, and the 2020 COVID-19 pandemic. At the time of writing, the S&P 500 had dropped a further 1.92%.
An abrupt and unilateral tariff rollout has fuelled the elevated levels of uncertainty
While the administration has framed the tariffs as part of a long-term strategy to revive domestic manufacturing, reduce the fiscal deficit, and fund potential tax cuts, the abrupt and unilateral rollout has rattled investors. Reports suggest key decisions were made by Trump and his inner circle only hours before the announcement, with little to no consultation with international partners or business leaders – further fuelling market anxiety that these policies have been implemented without any sound economic underpinning or strategy.
The resulting uncertainty has made strategic planning difficult for businesses across sectors, and early assessments indicate these tariffs have triggered uncertainty levels on par with those seen during the onset of the Coronavirus pandemic. As a consequence, Trump’s economic policy now holds the lowest approval ratings of any US administration.
Following Trump’s election victory on 5 November 2024, markets initially reacted with optimism. Expectations of corporate tax cuts and deregulation sparked hopes of a pro-growth agenda. Between Election Day and the 19 February peak, the S&P 500 and MSCI World Index posted gains of 6.68% and 6.22%, respectively.
However, early enthusiasm has since been obliterated by the administration’s aggressive tariff policies. Mounting uncertainty around their scope and execution triggered a sharp reversal in global markets. From their February highs, the S&P 500 and MSCI World have pulled back 17.26% and 14.57%, erasing earlier gains and leaving the indices down 11.73% and 9.26% since Trump’s election – clearly signalling investor disapproval.
Tariff chaos versus previous market drawdowns
In periods of such rapid and severe drawdowns, it’s worth looking at recent historical parallels.
- The Global Financial Crisis (GFC) of 2008 serves as an example of a significant market drawdown. From the peak on 9 October 2007 to the market bottom on 9 March 2009, the S&P 500 and MSCI World indices contracted by 55.25% and 57.05%, respectively. This downturn was driven by systemic factors, including the collapse of the housing bubble and risky loans by financial institutions. The recovery from this period was relatively long. The S&P 500 and MSCI World indices did not fully rebound until 2013, with gains of 152.97% and 132.26%, respectively, from the trough. By the time of the peak leading up to the COVID-19 pandemic on 19 February 2020, the two indices had returned 528.88% and 369.27% each, demonstrating a strong recovery as systemic factors driving economic growth began to improve. (By contrast, the current tariff announcements were made in an era of US economic strength and not in response to a systemic crisis. In October 2024, an article in The Economist stated that America’s economy was “the envy of the world”.)
- The COVID-19 pandemic in 2020 saw a dramatic collapse. From 19 February 2020 to 23 March 2020, the S&P 500 and MSCI World fell 33.79% and 33.93% in just over a month amid widespread lockdowns and economic uncertainty. But aggressive intervention by the Federal Reserve, including rapid rate cuts, sparked a strong recovery. Within five months, the indices surged 52.65% and 51.25%, respectively, erasing all the prior losses. As a result of that strong recovery, the S&P 500 and MSCI World still posted returns of 18.40% and 16.50% for the 2020 calendar year.
- More recently, the 2022 market selloff was triggered by surging global inflation and an aggressive rate-hiking cycle by the Federal Reserve. From the 3 January 2022 peak to the 12 October 2022 low, the S&P 500 fell 24.49%, while the MSCI World declined 25.67%. Yet, within the next 14 months, both indices staged a powerful recovery – up 32.39% and 32.77% respectively from the bottom – driven by renewed investor optimism, particularly around the emergence of AI technologies.
While all of these episodes highlight the market’s ability to rebound sharply following deep selloffs, the catalysts and timing of those recoveries were unpredictable and unique. As such, it remains unclear what might reignite investor confidence – or how long the current period of volatility will persist. However, history suggests that the recoveries that follow steep selloffs are usually significant.
How have our funds performed on a relative basis?
The recent market correction has affected most equity funds. In such environments, we expect our “quality” funds to mitigate the beta risk associated with broader index exposure – a key component of our investment philosophy. The chart below highlights the performance of our preferred equity funds against both the MSCI World Index and the S&P 500 Index from 5 November last year (Election Day) to last Friday’s close. During this period, with the S&P 500 and MSCI World Index down 11.73% and 9.26%, respectively, our selected fund managers have added value by limiting drawdowns compared to the broader market indices.
Source: Infront
Our recommendations to investors
- In light of these developments, we believe investors already positioned in equity markets should remain patient and maintain their current allocations.
- For those who have been waiting for an opportunity to increase equity exposure, the recent selloff should offer a compelling entry point to begin phasing in capital – particularly given the extent of the market’s pullback from recent highs.
- Likewise, for SA investors seeking to remit funds offshore for international equity exposure may find this an opportune moment. While the rand has weakened approximately 8.4% at the time of writing from this year’s strongest level on 17 March, global equity markets have corrected even more sharply – potentially offsetting the currency impact and creating a relative valuation advantage.
- For clients for whom we were considering realignments which would have resulted in adverse capital gains tax (CGT) implications, the current market correction may present a favourable opportunity to implement these changes, as the CGT would be lower than at pre-crisis levels. Additionally, clients looking to transfer funds to a different entity may benefit from this market environment. A transfer of this nature would not alter the portfolio’s risk profile or the underlying assets, making it a tax-efficient way to execute a transfer while potentially reducing the impact of the CGT event.
In all instances, a measured, phased investment approach remains prudent, especially in an environment of elevated volatility and uncertainty over the recovery timeline.
What happens next?
- The “Silence of the Lambs”: Green shoots of political and monetary response are beginning to emerge. Public sentiment in the US – even among Republican voters – is shifting. Longstanding allies within the party who remained quiet during the election campaign are now expressing concern over the economic fallout of trade wars. Behind the scenes, key Republican officials are exploring ways to limit the damage from Trump’s tariff agenda, recognising the potential political consequences ahead of the 2026 mid-term elections if the current trend persists. Even renowned billionaires, such as Bill Ackman, who had previously endorsed Trump, are sounding the alarm for an “economic nuclear winter” resulting from these policies.
- The role of the Fed: At the same time, concerns around slowing growth have raised the prospect of monetary policy easing. The Fed may be compelled to act if current conditions persist, especially to preserve employment and avoid tipping the economy into stagflation. Futures markets have already adjusted expectations, now pricing in three to four 25bps rate cuts by year-end, up from just two cuts projected a few weeks earlier.
- Pushback from the American public: While the path forward remains uncertain, the emerging pushback from Americans is becoming evident, as they came out in masses to protest on Saturday with the slogan “Hands Off,” referring to the abuse of power from the White House.
These evolving dynamics may serve as early indicators of a shift in policy tone – providing hope that a more constructive economic environment could lie ahead.
In summary
While volatility may persist in the near term, periods of dislocation often present opportunities for investors. As the policy landscape continues to evolve, staying patient, measured, and responsive to new signals will be key drivers for investors in surviving the current market obliteration and to navigate the uncertainty that surely lies ahead.
