Fast reading
- Unease over President Trump’s tariffs policy continued to rattle stock markets this week.
- The ‘Magnificent Seven’ group of mega-cap stocks led the declines.
- US inflation data offered some respite for markets, with CPI coming in softer than expected.
US equities tumbled this week, as US President Donald Trump’s protectionist agenda continues to fuel uncertainty.
The US administration’s scattergun approach to trade tariffs has unsettled markets this month. On Thursday, the S&P 500 index entered correction territory – defined as a decline of more than 10% from the recent closing high – for the first time since October 2023, while the Dow Jones Industrial Average and Nasdaq indices shed 1.3% and 2% respectively1. The moves come amid fresh tariff threats, with the Trump vowing to impose a retaliatory 200% tariff on alcohol imports from the European Union (EU) in response to a levy on US-produced whiskey.
Weakening economic data has also raised questions regarding the overall health of the world’s largest economy, with the president responding in a TV interview over the weekend that the US economy was in a “period of transition” when asked about the possibility of a recession.
The so-called ‘Magnificent Seven’ group of mega-cap stocks led the declines earlier in the week, sending the Nasdaq down 4% in its worst day since 2022. The group has seen US$1.57tn2 drop from their total valuation since the start of the year, with investor sentiment fizzling following initial optimism after November’s election result.
Of the seven companies, carmaker Tesla’s share price fell the most – nosediving by 15% in its worst single-day drop since 20203 – while chipmaker Nvidia continued to feel the pressure from Chinese rivals in the battle for artificial intelligence (AI) market dominance.
Figure 1: The Magnificent Seven’s bumpy start to the year
In response, investors have turned their attention towards defensive sectors – such as telecoms and healthcare – which are better insulated from abrupt market moves, says Charlotte Daughtrey, Equity Investment Specialist, at Federated Hermes, adding that Trump’s policies are also supportive of the US small and-mid cap space.
“It’s important to remember that the US stock market is not the US economy and, while we have seen a softening of economic data, the economy doesn’t appear to be nearing an imminent recession,” she explains.
“Markets hate uncertainty and the flurry of executive orders; policy announcements and ever-changing tariffs (and responses) is the underlying cause of the stock market’s volatility. We believe that the short-term behaviour of the market will settle down over the course of the coming weeks as a clearer understanding of the policy backdrop materialises,” Daughtrey continues. “Overall, we remain constructive on the outlook for the US and in particular US SMID stocks and view the ‘dip’ as an opportunity.”
It’s important to remember that the US stock market is not the US economy and, while we have seen a softening of economic data, the economy doesn’t appear to be nearing an imminent recession.
CLO moderation
Amid the noise, the structured credit market remains solid and continues to provide a source of stable returns, says Andrew Lennox, Senior Portfolio Manager, Fixed Income, at Federated Hermes Limited.
But the market is not entirely immune, he explains. “While asset-backed securities (ABS) activity is quiet, collateralised loan obligations (CLOs) have been more responsive, led by US CLOs,” he says.
“It remains a moot point whether the back up in CLOs has been more due to the sheer volume of new issues, refinancings and resets hitting the market or in response to the wider market sell off. The market has seen almost 300 deals year-to-date coming into this week. The reality is probably a combination of the two,” Lennox adds.
“Bookbuilds are taking a little longer with more moderate demand in mezzanine tranches, however the market had rallied hard year to date with higher levels of oversubscription, so this moderation could be seen as a constructive pause in the relentless tightening in spreads.”
A glimmer of light
Markets received a fillip on Wednesday after reports that US inflation pressures eased in February, according to the latest data released by the Bureau of Labour Statistics this week. The Consumer Price Index (CPI) increased 2.8% year-over-year, while headline inflation grew 0.2% month-over-month – both softer than expectations of +0.3% and +2.9%, respectively. Core readings also came in soft versus expectations.
“We see this print as a response to last month’s surprise hot report – suggesting there may have been some latent seasonal issues in the January report,” says Damian McIntyre, Head of Multi-Asset Solutions at Federated Hermes. However, upcoming tariff policies could introduce upward pressure on prices in the near future, potentially offsetting the current trend of moderation, he adds.
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