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WEEKLY E-MAIL

WHY HAVE MARKETS BEEN VOLATILE?

By James Malliaros

Most of the time, share markets are relatively rational and don’t generate much attention. But periodically, they fall and create headlines.

The return of President Donald Trump to the White House has led to significant market turbulence, mainly due to tariff announcements, combined with DOGE’s (Department of Government Efficiency) cuts to the federal workforce.

From their all-time highs in mid-February to early March, US shares (S&P 500) have fallen about 7%, with the technology-heavy Nasdaq in correction territory losing 10%. Over the same period, Australian shares (S&P/ASX 200) have fallen nearly 9%.

Major US stock indexes since President Donald Trump took office

Source: Yahoo! Finance

What’s driving the fall in share markets

The key drivers of the fall in shares are a combination of:

  • Stretched valuations after a relatively calm year in 2024 with strong returns, which left shares vulnerable to a pull-back on any bad news
  • The arbitrary imposition of tariffs on imports from countries like China, Canada, and the European Union
  • Frenetic and often contradictory policy announcements from the White House around tariffs, public sector cutbacks, and US relations with allies have contributed to a run of weaker US economic data and fears of a recession
  • Those fears intensified after President Trump and members of his team seemed not to rule out a recession with talk about a “period of transition” and saying that they are not worried about falls in the share market and Treasury Secretary Bessent talking about 6-12 months of pain and “a detox period.”

From an Australian perspective, the tariffs have the potential to have some notable impacts:

  • Increased Costs and Supply Chain Disruptions: Australian companies relying on Chinese imports face higher production costs and potential supply chain disruptions. This affects various sectors, including manufacturing, retail, and construction.
  • Broader Economic Implications: The tariffs may contribute to inflationary pressures, potentially slowing economic growth. The Reserve Bank of Australia (RBA) may need to adjust its monetary policy in response to these changes.
  • Market Volatility: The Australian share market (ASX 200) has experienced a significant drop, with investor sentiment being cautious, leading to fluctuations in share prices

Despite these challenges, Australia’s direct trade linkages with the US are relatively small, which will help limit the fallout.

We have seen a short-term bounce in recent days. However, increasing uncertainty and stretched valuations mean there is still a risk of further falls. At some point, economic weakness and its impact on support for President Trump and the Republican party, along with share market falls and slowing economic growth, will pressure him to pivot and focus on more positive policies. In the end, President Trump will not want the economy to go into a deep recession, nor will he want the share market to collapse. It could cost him too much politically.

Outlook

The current downturn is consistent with the many selloffs experienced in the past, such as in April and August 2024. We recommend staying the course, though financial markets could be in for a bumpy ride over the next few months.

The signals to follow now are the fundamental economic ones:

  • The US economy looks to have slowed down slightly to around a 1.5% GDP growth rate from the mid-2.0 % range. As such, the risk of a material further fall for the share market remains low.
  • The US employment market is holding up, with recent data signalling confidence in the outlook for jobs. However, recent weekly surveys of layoffs have begun to pick up a lot, tied to DOGE and the public sector.

James Malliaros
Senior Financial Planner
Certified Financial Planner®
SMSF Specialist Advisor™
Authorised Representative No. 291633

If you have any questions or comments, please email me at james@gfmwealth.com.au

Disclaimer: This document is not an offer or invitation to any person to buy or sell any interest in or deposit funds with any institution.  The information here is of a generic nature, and does not take into account your investment objectives or financial needs.  No person should act upon this information without firstly seeking competent, professional advice specifically relating to their own particular situation.

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