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One of the many notable things about the beating under way in US stock markets is that US government bonds are not really picking up the slack. This is not a good sign.
Treasuries are typically the yin to stocks’ yang. When stocks take a hit, bonds generally jump as investors flock to safer shores. They are known as the “risk-free” asset after all. This is a mechanism that has helped many a diversified portfolio over the decades, with only rare exceptions.
In this month’s rapid stock market shakeout, however, the balancing act is not quite working out. US stocks are being monstered, down 5 per cent this month so far, and we are only halfway through March. We’re down 8 per cent since mid-February. At the same time, bond prices have picked up over the course of this year, but not dramatically so. Crucially, benchmark 10-year US government bonds are at roughly the same level now as they were at the end of last month.
This tells you that this is a sentiment shock. It’s not the economy, stupid. That makes it harder to fix. The data on the US economy is wobbly but not terrible, certainly not as ugly as the markets shakeout would suggest. US inflation slipped back to 2.8 per cent in February, a sign that the economy is weakening a bit but not tanking.
But that’s not really what is putting off investors. “We are selling US assets as we speak,” Michael Strobaek, chief investment officer at Swiss private bank Lombard Odier, told me on Friday morning. “We are going through the valley of pain right now.” This is quite the switch in view. This time last year, Strobaek was talking about the “geostrategic” imperative of buying and holding US stocks. At the turn of this year he was still all-in on American exceptionalism.
The US economy has not changed his mind. Instead, it was what he calls US vice-president JD Vance’s “ultimate provocation” to Europe in his speech to the Munich Security Conference in February. Then it was Donald Trump’s ghastly treatment of Ukrainian President Volodymyr Zelenskyy in the White House days later. Then it was the threat of US tariffs against Mexico and Canada. “It’s absolutely clear they are hitting this agenda with a sledgehammer,” Strobaek said. He is now retreating out of stocks and into bonds and cash instead.
At some point, the constant flip-flopping on tariff policy from the Trump administration will hurt the real economy. Wealthy Americans are heavily exposed to now swiftly sliding stocks, so this will hit them in the pocket. Companies will pull back on spending, in case they are walloped with a random and painful policy shift. Even more alarming for investors, the uncertainty makes it very difficult to make earnings forecasts with any conviction, leaving fund managers flying blind.
The mood is dreadful. Trevor Greetham, head of multi-asset at the UK’s Royal London Asset Management, noted that in his sentiment tracker, running all the way back to 1991, the past few days rank in the 50 grimmest in the market that he has observed. This period is churning out days right up there (or down, I guess) with such entertaining episodes as the failure of Lehman Brothers, the euro crisis, and — one for the finance hipsters here — the demise of the Long-Term Capital Management hedge fund in 1998.
Again, Greetham points out, it’s not the economy that is hurting here. It’s the tariffs, the geopolitics, the uncertainty itself doing the damage. And “central banks are not there for you for that”. In other words, the Federal Reserve is not going to ride to the rescue as it did in, for example, the Covid crisis five years ago.
If investors did believe the Fed would gallop in on a white horse to cut rates and fix the mess, bonds would be markedly stronger than they are today. Instead, investors are looking ahead to a slower growth, higher inflation future that monetary policy can’t easily fix.
That leaves no short-term catalyst to turn this situation around. Barring a personality transplant for the US president, an intervention from an adult in the room or a sudden crash in the real economy that sparks massive Fed cuts, there’s nothing to stop the rot. “We’re in falling knife territory,” Greetham says.
Treasury secretary Scott Bessent has dismissed the impact of “a little volatility” in stocks. The White House message is short-term pain for long-term gain. Wall Street heavyweights from Goldman Sachs and Blackstone have this week praised the potential upsides of Trump’s beloved tariffs. I’ll have whatever they’re having.
Even if the administration wanted to pressure the Fed to make cuts, that would be viewed by investors as an unseemly intervention in the central bank’s independence that would probably make matters worse.
Everything has a price, and temporary bounces in broad declines are par for the course. At some point, US stocks may become cheap enough to reel in the bargain hunters. But at a price-to-earnings ratio of 24 times, compared with 17 in Europe, it is hard to argue we are there yet. Fund managers are left with scant reason for optimism. Maybe US investors will not notice Trump’s proposed 200 per cent tariffs on proper French champagne after all.
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