A fortnight ago, the world index traded at a new all-time high. Meanwhile, we are down about 5 per cent. There are three reasons for this pullback. Trump’s presidency plays a role in all three, but as in the past, it is good to take Trump seriously, but above all, do not take him literally. According to Trump’s book ‘The Art of the Deal’, part of his negotiating technique is that he bets high and then makes a much smaller deal. The disadvantage of this strategy is that repeating it regularly creates habituation and less results. That is what Trump is now trying to do something about.

Until 19 December, the market reacted shruggingly to reports of new import tariffs, the war in Ukraine and its impact on the US economy. Just as the market assumed Trump would not follow through, Trump realised surprisingly few new successes and deals. As a result, Trump is now betting higher and getting a better grip on the market, which can also ensure more deals.

Import tariffs

Import tariff increases are not an end in themselves but are mainly used to conclude bilateral agreements. They are announced but often postponed or even cancelled the same day. The impact of tariffs on the economy and inflation remains small for now.

By raising the bar with demands, Trump hopes to bring his advantage of unpredictability back into the negotiations, at the risk of causing a more significant loss of confidence than necessary. Loss of confidence, of course, is not suitable for the economy. Trump does charge himself with developing the US financial markets. Meanwhile, the S&P 500 has surrendered all its gains since his re-election. So, to keep his own ‘Trump trade’ alive, he needs to get down to business, but positively.

War Ukraine

Given the sharp rise in European arms manufacturers’ shares, a much larger conflict seems imminent. However, replacing the presence of the US military in Europe with a European army is not that simple. Many countries in the European Union do not have a significant army.

For example, building such an army by introducing conscription takes a long time. People need to be trained and the question is by whom. There are two countries — France and the United Kingdom — that do have an army of some size, but these are precisely the countries with no budgetary air.

Furthermore, there may still be European people who want to fight for their countries, but fighting for the European Union is something else. Of course, the recent conversation between Zelensky and Trump has made the market now seem more convinced of the most unfavourable outcome, but the hardening back and forth makes the chances of a deal more likely rather than less likely. Ultimately, there will be a peace deal in which both sides must settle.

Economy

Figures on the US economy have been weakening in recent weeks. Although purchasing managers showed a promising rise earlier, the increase came mainly from higher prices and the most forward-looking order component, which was disappointing.

Consumer sentiment is also deteriorating, although such surveys are less reliable since the pandemic. As a result, the market is counting on three US interest rate cuts for the first time this year. There is a 50/50 per cent chance that the Federal Reserve will cut interest rates in May.

One consequence of this development is a rotation in the stock market towards more defensive stocks. However, a rotation is somewhat different from a correction. If the heavyweight mega caps start falling, the broader index will soon fall.

Conclusion

Interim corrections are a part of equity investing. It is the price every investor has to pay for the higher returns on equities compared to many other assets.

Volatility will likely continue for some time, but all signs are right on green. Valuations are attractive, the economy and profits are growing, central banks have more room to cut interest rates, yet sentiment has not been this negative for a long time. In this respect, the downside potential is limited.