Traders work on the floor of the New York Stock Exchange in New York City, on April 7, 2025. Wall Street stocks opened sharply lower Monday, joining a global selloff on worries that a trade war induced by US President Donald Trump's tariffs will spark a global economic slowdown.
Image: AFP
Peter Armitage and Peter Little
Global stock markets are tumbling, and certain shares are approaching attractive levels. US President Donald Trump’s tariff announcement last week has resulted in a severe equity market meltdown at a pace faster than the start of the COVID-19 pandemic in early 2020. This article attempts to put the decline into context and assess what investors should be doing.
We conclude that investors should not be crystallising losses. We have not reached a point for major decisions – the events and market reaction are only a few days old (!). We seldom recommend selling into panic, which is precisely what is happening in the markets. For investors who are underweight equities, some shares are reaching attractive levels, but we would wait for things to bottom out in a market, which could well be in a short-term freefall. Actual market levels started the year at high valuations and, even after this drop, are not cheap in aggregate. Equity markets were not pricing in much room for error, and investors are now moving quickly to correct that – that process is not an exact science and can often overshoot in the short term. We would advise patience in these volatile times.
At a time when markets could swing up or down by 10%, making definitive calls is an impossible task. Unlike many market routs in recent decades, this situation is entirely “man-made” and self-inflicted. This means that a change in policy or direction could see markets bounce back just as quickly – nobody can predict the very short-term outcome. What we can do is better understand the context.
First, what has happened to markets?
The table below shows that, based on the futures markets, the US market is now 20% off its highs, which the media likes to call a bear market.
Figure 1: The US futures markets, performance since highs
Image: Bloomberg, Anchor
This is a significant drop in a very short time, as shown in the graph below of the S&P 500:
Figure 2: The S&P 500’s performance, April 2020 to date.
Image: Bloomberg, Anchor
The market drop of the past month has erased most of the 2024 gains. So, the big question is whether this is a correction and we bounce from around these levels or if there is more to come. One of the key observations from the chart above is that the move has been extreme, and it usually takes weeks or months for the market to find its bottom (not days!).
One of the nuances to be recognised is that world equity markets have done somewhat better than the S&P 500, especially if measured in US dollar terms. This is because non-US markets have performed better than the US, and the dollar has weakened by around. 5% year to date (YTD). Many European markets are still up in US dollar terms, and the MSCI World Index is “only” down 10% YTD in US dollar terms (see table below).
Figure 3: Major global market indices’ performances over select periods.
Image: Bloomberg, Anchor
Are markets now cheap?
We have been pointing out for some time that markets have been at very high valuation levels, and the market was certainly not priced for this growth shock. After the correction, the forward 18.2x P/E is now roughly in line with its 10-year average and still around 10% higher than the 20-year average. This is perhaps the strongest argument for not being overly bullish at present, and the market can still fall by a further 5%-10% before we consider it as being in cheap territory. We must also bear in mind that this is based on forecast earnings, and we can be fairly sure that US earnings growth will be downgraded, at least in the short term.
Figure 4: S&P 500 forward P/E
Image: Bloomberg, Anchor
Why are the Trump tariffs so damaging for markets?
We would categorise the events of the past week as a global growth shock – a change in the expectations for global growth.
We have been in a period of globalisation over the past two decades, where production has shifted to the cheapest regions, and this has been good for global inflation. Tariffs can effectively reverse this and see production move back to the US (and other home territories). However, this will take years to achieve, and, in the meantime, imported goods will cost more and increase inflation by 1%-2% in the US. Uncertainty also creates a delay in decision-making, which is bad for economic growth. The combination of these factors can see US economic growth slow sharply, and the odds of a recession have increased. Interest rates are at high levels, which is seemingly a comforting starting point, as the US Federal Reserve (Fed) hence has the tools to stimulate a slowing economy.
However, the Fed is faced with the dilemma that inflation will be rising as the economy slows (often called stagflation, which is usually characterised by high inflation, low economic growth and high unemployment). Hence, it will be hesitant to cut rates too aggressively.
The key risk is that inflation increases and is sustained at higher levels. Higher inflation generally results in lower valuations, as the cost of capital is higher, and it results in future cash flows being worth less.
Economists and the market are still trying to make sense of the impact of Trump’s announcements last week. International Monetary Fund managing director Kristalina Georgieva said the organisation was still assessing the macroeconomic implications of the announced tariffs, “but they clearly represent a significant risk to the global outlook at a time of sluggish growth”.
So what happens next?
As investment professionals, we are acutely aware of what is happening out there in markets, but most of the population will remain blissfully unaware. We thought this estimate from Morgan Stanley that bear markets only start having a material impact on consumer behaviour and, by extension, economic activity when you have roughly 30% drawdowns in equity markets was pretty interesting:
What about SA?
At the moment, the world is in “beta-1 mode”, which means that all global equity assets are tanking in unison. South African (SA) markets have performed relatively better than the US market in rand terms because of the high level of rand hedges. However, last week, SA also saw the biggest threat to the continuation of the Government of National Unity emerge. At best, confidence has been severely dented, and the prospects for a domestic resurgence have dimmed. However, certain SA shares are at very attractive levels.
Peter Armitage, CEO and Co-CIO & Peter Little, Fund Management.
*** The views expressed here do not necessarily represent those of Independent Media or IOL.
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