Increased volatility in the stock market: what do you do with it as an investor?
'Liberation Day'... That is the term President Trump used on 2 April 2025 to mark the day he announced new import tariffs. It is seen as the beginning of a trade war with economic consequences worldwide. It has already led to major stock market swings in recent weeks. Mark Van Assche, account manager Private Banking and Wealth Office, talks about it with Baptiste Mesot, portfolio manager at KBC Asset Management.
06/05/2025
Economy
- The American consumer is pivotal to the economic dynamism of the US. The trade war is creating a huge amount of uncertainty, as a result of which our economists have lowered growth forecasts for this year and next. Growth in the US contracted in the first quarter as a result of high import figures.
- In Europe, additional public spending on defence and infrastructure appears to be bolstering optimism about growth in the medium term, whereas the launch of import tariffs on European products in the US will have an immediate and negative impact.
Commodity prices - inflation
- For the time being, inflation rates are continuing to move in the right direction, thanks in part to lower oil and gas prices. Even so, inflation worldwide – but especially in the US – will increase again due to Trump’s policies (as a result of planned import tariffs and the impact of stricter migration policies on the labour market).
- However, the speed at which higher tariffs will translate into rising inflation remains uncertain, though US inflation expectations for the next 12 months have increased significantly.
Fiscal and monetary policy
- The US government seems determined to reduce the budget deficit, including by means of cost savings in government (DOGE). The question is whether the promised tax cuts can bring relief.
- China continues to regularly support its flagging economy through new policy decisions.
- In the euro area, the major investments announced for defence and infrastructure are gradually taking more concrete shape, although it looks like their impact won’t be felt until 2026-27.
- In April, the ECB cut its key rate by another 25 basis points. A further cut may follow in the middle of this year. We expect that the Fed will also ease its key rate further this year, but the extent to which higher inflation (due to the announced import tariffs) will prevent it from slashing interest rates if the economy falters remains to be seen. For the time being, the Fed is not succumbing to pressure from Trump, keeping the rate unchanged.
Bond markets
- Bond markets are also reeling from the trade war and are anticipating an adverse impact on economic growth and (expected) further cuts in key rates. As a result, yields are falling on sovereign bonds.
- This is largely offsetting the increase in German interest rates at the start of this year.
- US interest rates are falling less sharply for now, as the uncertainty surrounding US debt has increased.
Stock markets
- Taking a 90-day pause before the high import tariffs of ‘Liberation Day’ take effect has given stock markets some breathing space.
- However, whether we’re completely out of the woods is doubtful. Everyone is now subject to the uniform import tariff of 10% – considerably higher than the average import tariffs of 3.5% that had been in place – while China is subject to 125%.
- It remains to be seen to what extent negotiations can turn the tide. Meanwhile, corporate earnings forecasts for 2025 are being lowered, although reporting for the first quarter has got off to a fairly strong start. However, quite a few companies are issuing warnings about the future.
Risks
- The conflict in the Middle East and Ukraine could continue to cause nervousness. As far as what will happen to the aid to Ukraine, Border disputes are also on the rise between India and Pakistan.
- Moreover, support for the German government seems limited, which may affect planned spending.
- Lastly, Chinese AI technology may throw a spanner in the works due to the fact that DeepSeek has achieved impressive results at a fraction of what it costs in the West.
As expected, the US experienced negative growth in the first quarter. Economic data on other areas such as the labour market remains encouraging
Siegfried top, Senior Investment Strategist KBC Asset Management
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