When ‘liberation day’ became ‘liquidation day’: Crispin Murray on how to invest in a Trump world

Here, Pendal’s head of equities Crispin Murray dissects the key questions for investors and explains how to respond following the latest slew of US tariffs

• An unprecedented event with many unpredictable factors
• All the questions investors need to consider
• Find out about Pendal Focus Australian Share fund

PRESIDENT Trump went hard on tariffs, defying market expectations that he would blink.

A historic market price adjustment followed, as “liberation day” became “liquidation day.”

Effective tariffs have risen from 2.5% at the start of year to 24%. Given tariffs are effectively taxes, this equates to a US$700bn tax hike or 2.4% of US GDP – the biggest in history.

Not only were the size of tariffs well above expectations, but the design had nothing to do with matching pre-existing tariffs. Instead, there was a blanket approach based on the size of trade deficits.

This led to higher-than-expected tariffs on the EU (20%) and China (an incremental 34% to 54%).

The message is that tariffs are designed to force companies to shift production to the US.

Investor Howard Marks – who is 78 years old – noted that the move from a system of free trade and globalisation to one with significant restrictions on trade is “the biggest change in the environment probably in [his] career” and “a step towards isolation”.

The shock from the tariff announcement was compounded when China retaliated with its own 34% tariff on US goods, signalling the beginning of a trade war.

The market’s immediate reaction was to cut economic growth forecasts and raise inflation expectations, which equates to lower earnings and valuations. The starting point for tariffs is so high that even large, negotiated concessions will not prevent the economic shock.

Markets adjust quickly, with moves compounded by the need for some investors to unwind leverage and access liquidity.

Such market dislocation becomes self-perpetuating as correlations spike, with factors driving relative returns and volatility surges (the VIX – a measure of market volatility – rose to 45%) which force investors to further liquidate positions.

The result was a 9.1% drop over the week in the S&P 500 and a 10.0% fall in the NASDAQ. The S&P/ASX 300 fell 4.0% and the Australian Dollar was down 3.8% versus the US Dollar.

These falls spilled into other asset classes – for example, Brent crude oil fell 11% and copper fell 14%.

Despite the inflationary impact of tariffs, bond yields fell on expectations that central banks will be forced to ease as we skirt with recession.

For investors, the question is how to respond to this new landscape. The challenge is that this event is unprecedented and there are many unpredictable factors.

We will dissect some of the key questions below and explain how we view them.

The details

Trump announced a baseline 10% universal tariff, which can be thought of as a subscription fee to access the US consumer.

In addition, there were sixty individualised rates – the key ones being 34% on China and 20% on Europe.

There are some exemptions for specific sectors and relief for goods that comply with USMCA (United States-Mexico-Canada Agreement) requirements.

The weighted tariff is moving to 24%, which is the highest in more than 100 years. This will probably rise to 27% when the section 232 tariffs are announced on strategic products such as pharmaceuticals, microchips and copper.

Understanding the why

Everyone knows tariffs are bad.

US economic history is scarred by the Smoot Hawley Act of 1930, which imposed 20% tariffs and – in combination with the wrong Fed response – triggered the Great Depression.

Tariffs are a tax on consumers and producers, which lead to higher prices, diminish disposable income, and eat into corporate profit margins – affecting employment and investment.

Tariffs of 22-25% equates to a U$700bn tax hike, which is hugely damaging to the US economy.

So if this is so well understood, why do it?

The logic, when you listen to the Trump Administration and key influences like former US Trade Representative Robert Lighthizer, is that this is better than the alternative.

They believe there has been a failure of the system. Treasury Secretary Scott Bessent refers to it as the “steroid economy”, which looks good on the outside but is killing your internal organs.

To summarise the Administration’s perspective:

1. The US is effectively transferring a US$1trn of wealth a year as it borrows to fund unsustainable spending. Much of this is going to their greatest geopolitical rival, China.
2. Millions of jobs have been lost as production shifted offshore.
3. The US is falling behind as a technology leader. They cite the Australian Strategic Institute, which claims the US is behind China in 57 of 64 critical technologies.
4. The loss of jobs and technology leadership has led to declining productivity, affecting growth and wages. There has been median wage stagnation for decades.
5. This has led to unsustainable income disparities. The top 1% have more wealth than the middle 60%. And 88% of the stock market is owned by the top 10%, the balance by the next 40% the other 50% of people are in debt. Scott Bessent noted that last year was a record for both the number of Americans travelling on European vacations and the number of Americans having to use food halls to get by.
6. The US is strategically vulnerable. They see Covid as a beta test, which demonstrated the economic vulnerability in the event of a kinetic conflict.

Citing Alexander Hamilton, the first US Treasury Secretary (1789 to 1795), tariffs protect industry and help fund the building a new America. Under Trump, they also act as a negotiation tool.

This is a dramatic change in economic policy and how the global economy will operate. It is trying to force companies to move back to the US, so products can be sourced there and jobs created.

This means there can’t be special deals or major exemptions, as all this does is shift production from one low-labour-cost nation to another.

Universal and permanent tariffs are required to solve the problem. To quote Lighthizer, “you can’t have a hole in the net to allow all the fish to swim out of.”

So, while there may be some dilution of tariff rates to lower levels, it will still probably equate to at least 15%, which has a major impact on the economy.

Absent a major shift from Trump, the intention appears that tariffs will remain in place and force companies to shift production.

How will other countries react?

This is a significant factor in assessing the overall economic and market impact.

China went hard and early. Tellingly, it imposed a blanket 34% tariff – matching the US – which is more substantive than its response to previous US tariffs.

It also expanded export controls on rare earths (7 of 17 elements), which are used in the defence industry.

The logic for this is that even if there can be some agreement to bring the tariff rate down, it will take some time. The G7 meeting in late June may be too soon – then it may be as late as around the G20 summit in November. So, China feels it needed to send a strong signal.

We note they didn’t play their real card, which is to forego law around intellectual property and go after US companies that way.

The market is watching for the US reaction.

Washington was clear that it would punish any retaliation, so there is the potential for a tit-for-tat counter from the US this week. But no action from the US could embolden other countries to retaliate.

China is in a difficult position – only 7% of US exports go to China, so the US estimates that the effect of tariffs on the Chinese economy is around three times that of the effect of reciprocal tariffs on the US. Some estimates put this at 2% of Chinese GDP if they remain in place.

The Chinese will need to stimulate – and the earliest likely announcement could come at the Politburo meeting in late April.

Expectations will be for stimulus of around 1% of GDP, probably orientated to industry and infrastructure.

The other challenge for China is that other countries will become wary of Chinese product dumping as the US market closes for them, which could lead to additional tariffs.

At the other end of the reaction curve, Vietnam raised the white flag and said it wanted a deal to potentially remove all tariffs. Trump acknowledged this and there are discussions to see what sort of deal can be done. While Vietnam is small, it is a relevant test.

Part of any deal could involve shifting key communications technology from Chinese to US suppliers. If there is a deal, it will be interesting to see if it does represent a hole in the proverbial fishing net. We note stocks like Nike were up Friday on this hope.

What is the impact on the US economy?

Estimates for the impact on US GDP range from 1.5% to 2.0%, with the lower end of the range relying on some walk-back of tariff rates.

In addition, it leads to around a 1% rise in the expected inflation rate over 12 months.

The Administration is claiming this will not be the case. It acknowledges there will be a near-term slowdown but blame this on the effect of weaning the country off the artificial stimulants of the Biden economy.

It points to a few mitigating factors regarding growth and claims tariffs will increase growth towards 3% in the medium term. The argument for growth includes:

1. Proposed tax cuts. These go beyond the extension of the previous Trump tax cuts, which will have no economic benefit as they sustain current tax levels. Rather, it points to US$400-600bn revenue from tariffs to fund election promises of no tax on tips and overtime and tax deductibility on loans for US-made cars. This will underpin consumer spend, it says.
2. Investment as companies reinvest in US capacity.
3. Lower energy prices – oil prices fell last week on increased OPEC supply and concerns over demand.
4. Lower bond yields and interest rates.

The Administration believes the inflation effect will be contained, with companies absorbing 40% of the hit and a higher currency another 40%, leaving the consumers wearing 20%.

So far, the currency has not moved that way (the US Dollar Index fell 1% last week) and most economists see a more material inflation effect.

It also notes that the current situation is very different to 1930. Then, the US had run trade surpluses for 60 years and were more vulnerable to the impact of tariffs and to retaliation. While this may be true, the scale of the tariffs still represents a material economic shock.

Further, a number of mitigating factors like tax cuts and investment are not going to kick in until late this year – at best – so will not fill the hole created by the tariff policy.

The market focus is now on what may change in response to lower growth – either a “Fed Put” or a “Trump Put”.

How will the Fed react?

Federal Reserve Chair Jerome Powell spoke on Friday and, according to language modelling by JP Morgan, it was his most hawkish speech in years. The Fed’s key challenge is that:

1. The economy is currently still in good shape – the jobs report on Friday was positive, as were global ISM surveys in general. It is believed there has been a good recovery in consumer spending in March after a softer January and February. So there is no immediate issue the Fed can point to justify cutting rates.
2. The Fed’s stated key focus is on inflation expectations and ensuring they stay anchored. Recent inflation data has picked up and surveys have indicated consumers are anticipating a rise in inflation. To quote Powell, “Our obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem.”

Powell’s cautious message is tied to trying to keep those expectations down.

The Fed knows the economic effects are material and that a slowdown will help contain the flow-on effect of the tariff price rises, which opens the door to easing monetary policy.

The economy is expected to fall away very quickly. We may see evidence of this as early as April’s employment data, which comes out prior to the next Fed meeting on 7 May.

The market has moved to pricing a 47% chance of a May cut, up from 19% last week.

In a recession, the average cutting cycle is 350 basis points (bps). Given the 100bp move already, that still leaves another 250bps of rate downside.

The market now is expecting four more cuts this year, down to a range of 3.25% to 3.50%.

While the Fed will not worry too much about equity markets, a credit market dislocation would prompt action. Here, we are now beginning to see some strain – with a spike in the two-day move in credit spreads.

Debt issuance has dried up and this is also a key consideration for the Fed, as it represents a tightening of financial conditions which compounds the effects of tariffs. The Fed has reacted to issues in the debt market in all crises over the past fifteen years.

The market’s challenge is that given the Fed’s focus on inflation, it will need to see bad economic news first before it can move.  So, we need to be mindful of the sequencing of events.

Ultimately, we see the Fed Put as real and it does represent the most likely counter to the bearishness. There is a scenario that, come the second half of 2025, we get the trifecta of:

1. material rate cuts
2. tax cuts
3. lower negotiated tariff cuts.

This could lead the market to rebound quickly – the issue is, from what level?

Could something else break the tariffs?

There is some speculation that other factors could see a reversal on tariffs. These include:

1. Political pressure. Republicans are concerned, and this will build as the economic data deteriorates, but there is a little they can do. Also, compared to the last Trump Administration, there are more MAGA Republicans in Congress.
2. Legal pressure. The court cases are beginning and will grow, some focusing on the fact that Trump is utilising age-old emergency powers to enact these changes. There are precedents for this – Biden used similar powers to wipe out student debt. The issue is these challenges will take time and the damage to the economy will be done before any could potentially take effect.
3. Economic and market pressure. The “Trump Put” in response to opinion polls could still be the source of major U-turn. A market observer close to the Trump team notes his background in TV, where he was obsessed with ratings. Similarly, if he saw he was losing his base of working-class Americans he would probably pivot quickly. The key point here is this is not a stock market-related level. Rather, it would be in response to losing the messaging as a result of economic weakness.  So this possibility is further off than the Fed Put.

The market’s reaction

Friday saw the first tangible evidence of capitulation selling in the US.

1. Sentiment extremes. The CBOE Volatility index (“the VIX”) spiked to 47% intra-day and the VIX forward curve (Spot VIX minus the three-month forward expected VIX) inverted to a degree not seen since Covid, which suggests an expectation of extreme near-term volatility. There was US$30bn of flows into the inverse S&P ETF and a wholesale raising of recession probability risks with, JP Morgan moving to a 60% chance of recession.
2. Indiscriminate selling. 72% stocks on the S&P 500 had a downside move two standard deviations beyond the mean. Friday was also the largest single day of stock-trading volumes in the US and we saw large selling of gold – which is a sign of investors seeking access to liquidity. The fall in the Australian Dollar can also be seen in that light, as there is the added issue of Super funds having large currency hedges getting margin called, which can compound moves.
3. Capitulative price action. 77% of S&P 500 stocks were trading at 20-day lows

The equity market move on Thursday and Friday is estimated to equal a 1.2% adjustment down in US economic growth. 

For technical traders, Friday’s US close broke through trendline support, the Yen carry trade low from August 2024, and the Fibonacci 38.2% retracement of the 2022-25 rally.

On a technical basis, that opens up potential downside to around 4800 and then 4500 for the S&P 500.

Markets don’t move in straight lines. As one technical analyst describes it, they move initially with a “bang” and then a “whimper”.

So we have had the big “bang” move and we may see a period of consolidation and an attempt to bounce, particularly if we get any positive signals from the Fed. However, the next phase could be the “whimper”, where the market eventually grinds lower and often volumes dry up until all hope is squeezed out of market sentiment.

Clearly this path depends on the economy and policy.

One unique aspect of this situation is that it is self-induced, so there is always the chance of some unwind.

Also, the effect on the rest of the world may not be so material if they react with lower rates – which is easier to do as they don’t have the inflation impulse – and fiscal stimulus.

The US market does not yet have valuation support. It is trading at ~19x price/earnings, having peaked at ~22x, but in recessions this falls to 15x on average – which is consistent with the 4500 targe S&P 500 index range.

The other issue is earnings risk. Goldman Sachs has cut its S&P 500 2025 earnings growth expectations from 11% to 3%.

The market consensus still sits at high-single-digit growth. If we get a recession, there is further downside risk here.

What does this mean for Australia?

Factoring in the pre-market futures fall for today, the Australian market is down 9%. This is better than the US but behind Europe. Our view is that the Australian economy is well protected and should avoid recession.

Factors supporting this include:

1. Fiscal stimulus. Unlike the US both sides of politics support higher government spending. This is adding over 1.5% to GDP growth in CY25, both through direct spending and also some tax cuts. Government spending represents around 29% of the economy and is growing around 8-9% in nominal terms.
2. Rate cuts. The RBA has left the door open for rates to fall in May, on the premise of a global shock and domestic inflation being close enough to target, subject to the March inflation report. Beyond that, the market now sees at least three cuts this year and our economy is still sensitive to this.
3. Weaker currency. The Australian Dollar has moved down in advance of an anticipated terms of trade shock from commodity prices falling.
4. Direct exposure. There is limited exposure to US exports and our tariffs are relatively low.

So, this would help sustain consumer demand, while government spending would support investment.

The main risk is a global recession affecting the local economy as financial conditions tighten and companies and consumers react with caution. Also, there is a risk of a terms-of-trade shock form lower commodity prices.

While we saw a sharp drop in copper last week, it is still up 10% year-to-date. Coal is weaker, while oil is down 12% for the month (also affecting LNG pricing), but iron ore has remained flat so far.

So, this has not yet occurred – and should China do another round of stimulus, we me be spared.

The local market has reacted as other markets have – correlations are rising and price action is dominated by thematics, positioning and liquidity.

The rotation in this environment is savage and unrelated to stock specifics.

Tech, miners and energy are the worst hit due to their perceived cyclicality. Banks, telecom and consumer staples were the best performers, partly due to their more defensive earnings (but also positioning is skewed away from these sectors).

Unlike the US, consumer discretionary stocks have held up quite well. Despite reasonable prospects for the domestic economy this sector still looks vulnerable, in our view.

Impact on portfolio positioning

This is a major test for the thematic exposure of our portfolios and a reminder of why we carefully manage these risks.

While our broad-cap Australian equity strategies have generally given back some relative performance in April given the substantial rotation to defensives, it is contained and relatively muted.

Generally speaking, our underweights in supermarkets and banks have detracted, but the defensive positions such as Telstra and CSL – plus reasonable cash levels – have helped offset this.

We have held back so far from stepping into heavily sold-down stocks given the degree of change in the global outlook. Given the scale of moves and liquidity available in the funds we may well start deploying some of this.

The focus here will not be on the high-beta names such as tech, where the market remains over-exposed. Instead, we are likely to be looking at well-positioned industrial names with strong cashflow and no exposure to tariff risk.

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About Crispin Murray and the Pendal Focus Australian Share Fund

Crispin Murray is Pendal’s Head of Equities. He has more than 27 years of investment experience and leads one of the largest equities teams in Australia. Crispin’s Pendal Focus Australian Share Fund has beaten the benchmark in 12 years of its 16-year history (after fees), across a range of market conditions.

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management. 

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