The investor fear gauge, otherwise known as the VIX Index, hit a four-week low as markets have now bounced back from their April nadir.
Read this article to understand:
- Why markets were quieter this week
- The ongoing influence of tariff and trade announcements
- How we are positioning multi-asset portfolios in this environment
As of the morning of Friday May 9, equity markets have spent the week slightly treading water and trading within a relatively tight range. In dollar terms, the S&P 500 has now made up for the seismic falls we witnessed at the beginning of April. But for UK and European investors, the continued weakness in the dollar means they are still nursing around four per cent falls on their US investments.1
The week started with the S&P 500 ending its longest winning streak since 2004.
The week started with the S&P 500 ending its longest winning streak since 2004, as it posted a decline on Monday for the first time in ten sessions. The S&P 500 is now up over 13 per cent and global equity markets, as measured by the MSCI ACWI in local terms, are up over 12 per cent, both from their lows of April 8.
Over the past week, markets also had a lot of economic and central bank data to digest. This began last Friday, with stronger than expected job data in the US, providing further substance to the country’s economic resilience story. This was backed up on Monday 5, when the purchasing managers' index (PMI) released stronger than expected numbers, with new orders rising to a four-month high.
It was also a busy week for some of the world's largest central banks. The US Federal Reserve (Fed) met on Wednesday, May 7, keeping rates on hold for the third meeting in a row. And on Thursday 8, the Bank of England announced it would reduce interest rates by 0.25 per cent, to 4.25 per cent. Markets were expecting both announcements.
The ongoing uncertainty around tariffs and economic growth was cited as a central theme for both the Fed and the Bank of England’s decisions. Fed Chair Powell emphasised elevated uncertainty and a wait-and-see approach, while the Bank of England's rate cut was based on the prospect of lower growth due to the impact of global tariffs.
Markets still had to contend with tariff updates on a daily basis.
Markets still had to contend with tariff updates on a daily basis. But the announcement of a deal between the US and UK, coupled with positive noises between the US and China, meant markets continued to price in a possible easing in the magnitude of US-imposed tariffs globally.
Meanwhile, companies in the US and Europe continued to report earnings during the week, with earnings growth in the US surprising to the upside. There were however issues for some companies providing future earnings guidance. For example, Ford suspended its full-year financial guidance as it warned that auto tariffs would weigh on profits.2
Outlook
Despite continued gains over the past number of weeks, investor sentiment remains cautious due to the uncertainty of tariffs and their knock-on impact on economic growth. We are still within the 90-day “reciprocal” tariff pause, and news flow over this period will continue to cause volatility in financial markets.
Our positioning in multi-asset portfolios
In portfolios where we have active discretion, we have increased our allocation to global equities from our initial defensive position as shorter-term market indicators have improved. As a result, we now hold marginal overweight positions in US, European and emerging market equites.
Within fixed income, we have structured our active positions to be less impacted by rising long-end US bond yields, by having more exposure at the five-year point of the Treasury curve. We also maintain overweight positions in UK gilts and German bunds, and have introduced a preference to the Japanese yen, based on the continued weakness of the US dollar and the yen’s safe-haven status.
We continue to monitor the situation to ensure the portfolios remain positioned appropriately. While cautious, we are still looking to add value where we have active discretion.
As longer-term investors, it is important to remain calm in these volatile and uncertain times. We continue to be confident that financial markets can provide the growth required by investors to meet their long-term goals.
