The week of the 10 March 2025 has been a turbulent and unpredictable week across global markets, marked by sharp swings and heightened investor anxiety. The USA’s main stock market has tumbled by over 8%, erasing several months of gains and signalling a significant shift in sentiment.
Particularly concerning is the drop of the talismanic "Magnificent Seven" — the powerhouse group of tech and AI giants that have been pivotal in driving market momentum — below their critical 200-day moving average. This suggests that the recent rally in high-growth sectors, which has dominated returns for investors for two years, has lost steam.
On a related note, US Government bond yields have fallen as investors seek refuge in safer assets. The decline in yields reflects a growing unease over the trajectory of the US economy, with weaker economic data and corporate outlooks fuelling fears of a potential slowdown. Additionally, uncertainty surrounding US trade policy and shifting diplomatic strategies is compounding concerns, particularly over how such policies might affect global supply chains and broader economic stability.
These moves highlight an environment racked with apprehension, where markets are not just reacting to data but also to the broader geopolitical landscape. Investors are increasingly wary of the potential for contagion, as policy decisions and economic pressures in the US risk rippling out across global markets.
This is a sharp contrast to the buoyancy of markets in Q4 2024, where investors were jubilant about Trump’s election and the ensuing tailwinds of tax cuts, onshoring and deregulation, and markets were driven on to record highs.
How did we get here?
This week’s volatility can be traced back to three key developments that have unsettled markets and compounded investor anxiety.
Firstly, the latest round of tariff impositions has reignited fears of a global trade war, and likely resultant spike in inflation and fall in economic activity. President Donald Trump has threatened to levy 25% import duties on European goods, whilst already enacting a 20% tariff on imports from China and 25% on goods from Mexico and Canada, as well as a 25% tariff on all metals imported into the USA. Unsurprisingly, these moves have sparked swift retaliation. Canada has responded with reciprocal tariffs. Meanwhile, China has imposed a 10% levy on US imports, deepening the tit-for-tat dynamic.
Whilst it should be no surprise that the self-styled "Tariff Man" has followed through on his threats, the scale and decisiveness of these actions appear to have caught markets off guard. Adding to the uncertainty is the White House's pattern of announcing tariffs, only to later revoke or modify them—creating a climate of confusion that makes it increasingly difficult for markets to price in a consistent trade policy.
Investors, already navigating concerns over fragile global economies and persistent inflation, now face the added risk of prolonged trade disputes that threaten to weigh further on global growth. This unpredictability is eroding market confidence, as participants brace for potential disruptions to supply chains and broader economic instability.
Further compounding concerns is President Trump’s seemingly nonchalant attitude towards the risks of recession and inflation. Tariffs, by their very nature, increase costs for businesses and consumers. Disrupted supply chains and higher import costs threaten to push prices higher, reducing consumers' purchasing power and dragging on aggregate demand—key ingredients for an economic slowdown. The bond market has already started to reflect this risk, with yields falling as investors seek safety in anticipation of a weaker environment ahead.
Yet, rather than seeking to calm fears, Mr Trump's response has been notably muted. He has characterised any resultant economic shock as a short-term sacrifice for long-term gain, offering little reassurance to consumers or markets. This dismissive approach risks undermining investor confidence, not just in the administration’s policy direction but in its commitment to safeguarding the economic interests of the country. Without clear signals of compromise or mitigation, markets are left to assume that further economic disruption is likely, fuelling anxiety and amplifying volatility.
Finally, and most unsettlingly for global stability, is the growing realisation that the post-Cold War security framework, long underpinned by US leadership, has fractured. The fiery exchange between Donald Trump and Ukrainian President Volodymyr Zelenskyy in the Oval Office marked a significant and symbolic rupture that has been building since Mr Trump was elected. For decades, Europe and the UK have operated under the assumption that the US would act as a security guarantor—an assumption now in question, to say nothing of the US actively taking on an antagonistic role, threatening the invasion of NATO and Commonwealth allies, or extorting Ukraine over mineral access.
In the wake of this diplomatic clash, European nations have been forced into a defensive posture, scrambling to reassess security strategies and ramp up investment in military capabilities that have been all-but-abandoned since the end of the Cold War. With the era of Pax Americana drawing to a close, Europe and the UK find themselves attempting to navigate a world where the "might makes right" mantra once again defines international relations.
This shift comes at an economically precarious time. European nations are already constrained by weak economic growth, limited borrowing capacity, and fiscal pressures. Balancing increased defence spending with other demands on the public purse promises to prove a profound challenge.
Markets are rightly sensitive to these pressures. The result is a heightened sense of unease, with investors recalibrating expectations in a world that feels less secure and more uncertain.
Activity and outlook
The breathless pace of change in markets is an indication that we are witnessing a marked rotation away from the extreme confidence in US markets that has dominated the past two years. This shift underscores the value of maintaining a regionally and sectorally diversified portfolio.
Our strategic decision in Q3 to increase allocations towards the so-called "unloved" markets of Europe and Asia has been beneficial, with these regions performing strongly relative to the US in the year to date. Similarly, our existing overweight position in UK equities—relative to the global index—has provided meaningful support to portfolios. These moves were not driven by short-term speculation but by a disciplined view that valuations and opportunities outside the US were compelling. More recently, we have marginally reduced our exposure to US equities in favour of bonds, enabling us to lock-in some profits after two strong years of performance. This adjustment has proved prescient, with bond prices rising as US equities have fallen.
The ongoing threat of tariffs across multiple countries—alongside the frequent changes and adjustments—continues to add to market uncertainty. Financial markets are inherently averse to uncertainty, as it makes pricing risk and forecasting outcomes more challenging. However, history shows that periods of heightened uncertainty tend to be short-term and can, in fact, be healthy for long-term market progress. Maintaining a long-term perspective is essential. Focusing on underlying fundamentals, rather than reacting to short-term sentiment swings, is a crucial discipline for any investor. It is time in the markets - not timing the markets - that drives long-term success, and this ethos underpins the way we manage your portfolios.
One of the most effective ways to remain focused on the long term, despite short-term volatility, is through diversification. In today’s volatile and fast-changing environment, diversification across regions, sectors, and asset classes isn’t just prudent—it is fundamental to long-term investment success.
Diversification acts as a buffer, helping to mitigate the impact of negative events in any one market or sector. It allows portfolios to capture opportunities from different parts of the world, whilst reducing the risk that comes from being overly exposed to a single region or asset class. Simply put, it’s about balancing risk and reward in a way that promotes resilience through market cycles and political upheaval.
As the year progresses, we will continue to monitor developments closely—tracking economic indicators, geopolitical shifts, and performance across our underlying funds. Our commitment is to remain vigilant and proactive, adjusting portfolios where necessary to navigate the challenges and opportunities ahead, as we have recently. We will, of course, be in touch to provide updates and insights as the market landscape evolves.
Mark, Chris, Dan, Matt, Scott and Florrie
Square Mile Investment Management Team