US stock markets saw their worst week on record since the Covid crash in March 2020, as trading came to a close on Friday—shaving off $5 trillion in market value of the S&P 500. The question on everyone’s lips is what happens now? Trader TV speaks to Paul Markham, head of global equities, at GAM Investments to discuss his reaction to Trump’s “reciprocal tariffs”, what could come next, how his buy-side firm is adjusting its portfolios in response and what data indicators will his trading desk be paying close attention to this week.
Markham also looks at the potential long-term effects of Trump’s tariffs and offer some advice to trading on how to approach this week.
Interview
Jo Gallagher Last week Trump rolled out a raft of new tariffs and markets across the board weren’t too pleased. How is your trading desk reacting to this and how do you position in response?
Paul Markham I think the difficult aspect of this, Jo, is it does feel as if there is some kind of regime change. And I think that from that point of view, it does feel necessary to adjust portfolios to a new reality. And certainly, from our point of view, we did act quite quickly. We’d already made a few adjustments to the portfolios in anticipation of this kind of event. The market was, I think, still nonetheless quite surprised by to what extent the tariff regime was conceived. We felt that we wanted to bring some of the economic cyclicality out of our portfolios and that took the shape of reducing quite significantly our exposure to US banks. We also added quite a lot more exposure to consumer staples, those kind of companies which are relatively acyclical, which have good cash flow characteristics. For example, we bought some food and tobacco stocks. So although it was uncomfortable to do that, I think to get that done quite quickly after the market opens. on Thursday was important, and that’s what we did. And we will continue to study the positioning of the portfolios over the coming days, weeks, and months. Although there may be a bounce in markets in the near term, it doesn’t feel like there’s any great rush to be buying those stocks which have fallen a long way. So I think at the moment, we’re happy to stay relatively cautious. We are trying to be as far equitized as we can, but with the kind of equities which don’t have too much volatility and have potentially some dividend yield or other sources of return embedded within them as well.
Jo Gallagher And so what data signals will you be paying close attention to this week?
Paul Markham I think certainly volatility measures such as the VIX are going to be important. I think clearly there are going to be some stocks where short interest may have been higher or is coming down or is growing. I think that there’s certainly things that could be interesting when it comes to taking a view on a stock once the fundamental decision on it has been made. I think the basic economic data around the impact on the consumer, sentiment for the consumer may be some of the PMI style. numbers coming out are going to be watched very closely to see how quickly the impact comes through in terms of real-world economics. Clearly, the market is going to hung up on whether or not the numbers which have already been published around the tariff rates are merely a negotiating position from Trump in sort of time-honored Trumpian way, or whether they are going to be seen through. So I think all of those things together are important. My sense, though, is that really what will drive markets over time now is what impact it has on economic growth, short to medium term, as regards to directionality of markets now, and that’s going to be the main concern, certainly of equity markets, but also, of course, in fixed income and other markets as we go forward.
Jo Gallagher And what are the long-term effects of these tariffs, both on the US and globally?
Paul Markham I think it’s hard to escape the idea that they will be suppressive to growth. There’s been a lot of discussion around whether or not they will inflationary, and it certainly seems that they could be in the short run, but if they then destroy demand in turn, that will also mitigate some of the impacts of that. The worst outcome, of course, for everybody concerned is stagflation. It’s very hard to find any asset class which can do well in that environment. Gold, I guess, in certain commodities and maybe indexing debt, but they will price that in pretty quickly should it come to pass. So I think that that is the big fear for the market. I think the other thing which is going to be really interesting, talking about is stagflation, is to see what the path of interest rates, bond yields, and currencies are. And I think that certainly if we wanted to be more constructive on some of the longer duration equities in the market, we would need to be reassured that bond yields weren’t going to be shooting up much, much higher. So I think all of these things are going to be quite a potent brew for the next several months and into the rest of this year. And as yet, it’s too soon to probably jump too far one way or the other. But I think what we should be thinking is that this probably does signal a moment when the economic situation of the world does start to deteriorate.
Jo Gallagher To wrap things up, what advice would you offer trading desks this week?
Paul Markham we’ve mentioned there was a value to transacting very swiftly last Thursday. I think going forward the intraday volatility will be such that it may be wiser to transact over the day. I think that’s certainly my preference from here. I don’t think it’s going to be a one-way street now. We may get days when it’s like that but I think on the whole we’ll see a much more of a two-way pull and I think also the opportunities to pick up or reduce stocks on some of those intra-days spikes will be there as well so I think there is sort of sense of dynamism that one needs to maintain. I think if things do deteriorate significantly further, one may find that liquidity does start to dry up and that’s something which I’d be very concerned about. And that can lead to some very significant outsized moves in individual names over the course of a day and of course that will benefit potentially certain types of derivative players as well. So quite a lot to think about. It’s certainly interesting times and from our perspective, it does give the opportunity I think to really revisit a lot of the portfolio and to look at some names which we haven’t owned or have wanted to own for a long time.
Jo Gallagher Thank you Paul for your insight, and of course, you for watching, this has been Trader TV This Week.
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