February Wrap Up - A natural reaction?

February saw the markets react to President Trump’s aggressive policy actions, introducing both uncertainty and disruption for investors. This has led to a decline in US Treasury bond yields, a weakened US dollar, and a pullback in major US stocks. The long-term economic impact remains uncertain, while the short-term highlights the challenges posed by the administration’s front-loaded policies, as well as a potential slowdown in the US economy. We remain focused on the medium to long-term view, however, and the secular trends driving investment opportunities.

Newton’s third law of motion was something our high school physics teachers tried to convince us to learn about. “Remember class, for every action there is an equal and opposite reaction”. As we watched the clock to see how long it was until lunch time, the other part of our brain questioned whether we would ever use this lesson when we got out in the real world…

February saw this come to life in a big way. Not even two months into his second term, President Trump and the new US administration have been pressing far harder and faster than many thought, enforcing many policies and executive orders. The intent of these is to further US interests, realign the US economy, and theoretically accelerate growth faster than it has been.

While the long-term result of this remains something of a ‘wait and see’, the short-term impact is much more real. Markets surged initially on Trump’s re-election win in November. But the reality of what markets and investors are seeing now is a natural ‘equal and opposite’ reaction. To put it simply: markets aren’t entirely comfortable with what they see – US market gains since the presidential inauguration have been largely reversed.

During February and the start of March, US Treasury bond yields (aka US Govt debt interest rates) have moved lower, which is typically a sign of future economic weakness (remember that yields move in the opposite direction to prices). Major US share indices are underperforming other markets, with Europe being the notable example up nearly 14% since the start of the year. Bitcoin has sold off. And the once infallible magnificent seven stocks are in correction territory (meaning down 10% or more from recent highs). Even the mighty US dollar has been weak.

We recently met with State Street Global Advisors’ (one of our underlying managers) Global Policy Strategist, Elliot Hentov. Elliot and his team’s assessment is that markets felt the administration might initially take a more moderate path when introducing disruptive policies (e.g. tariffs, immigration), easing them in alongside some of the positive ones (deregulation, tax cuts). However, in reality a lot of the challenging policies are being “front-loaded”, and this is causing uncertainty and disruption not just to investors, but businesses too.

Trade-wars, ‘DOGE’, and immigration reforms aside, there has also been heightened uncertainty around geopolitics, and the challenges this is posing to long-held alliances and expectations. Who would have expected a televised full-on argument in the Oval Office? The US reporting season has also largely wrapped up for Q1. While most companies have beaten expectations, the magnitude of the beats have been somewhat tempered, and forward-looking guidance is muted.

What does this all mean? While many companies in the US still appear to be doing very well, overall, it appears that the US economy may be slowing down. Whispers of the ‘stagflation’ word are appearing – stagnating growth, but sticky inflation.

Perhaps one of the silver linings to this situation is that it may act as a catalyst for slowing down of the policy uncertainty and volatile announcements. Again, for every action there is an equal and opposite reaction.

Periods like this happen more often than people think. Growth scares, like what some feel we are in now, and minor market pull backs, are all part and parcel of investing. But they are only ever a small point in time. Not to mention, markets saw a lot of this same tariff-based talk and negotiating in 2018 – and eventually, waved goodbye to it in the rear-view mirror too.

ASB’s diversified portfolios are designed to navigate this. We consistently keep a view on the medium and long-term horizon, and it’s important to look through the short-term noise and focus on some of the fundamental points that underpin the positioning of our portfolios:

• Mega trends continue to play out as expected – for instance, companies are still significantly investing in automation and data infrastructure.
  
  
• Broadening of equity portfolios is paying off – alongside US equities, ASB portfolios are well diversified across the likes of Europe, Australasia and Emerging Market economies, benefiting from any growth and shifts of assets there.
  
  
• The outlook for inflation continues to be uncertain - a careful approach continues to be warranted in the investing world, and as such we like the mindset of “optimistically proceeding forward, but with caution”. In response, the portfolios generally have a slight underweight to growth assets, along with holdings that generally do well in sticky inflation environments like Gold and Inflation-Linked Bonds.
  
  
• Our Strategic Asset Allocation review is underway – this annual process informs how our portfolios will be positioned for the year ahead. We do this to ensure the portfolios have the optimal mix of assets that reflect current investment opportunities while remaining resilient in today’s rapidly evolving geopolitical and economic environment.

In conclusion, while the current market volatility reflects the challenges of navigating an unpredictable geopolitical and economic landscape, staying focused on long-term trends and maintaining a diversified portfolio will help investors weather the storm and position themselves for future growth opportunities.