Monday Digest

Posted 17 March 2025

Just another growth scare, or more?
The stock market sell-off has resumed and US equities are officially in correction (-10%). US inflation was lower than expected, which usually pushes down bond yields, but the opposite happened – demonstrating that capital is flowing out of the US. The rapid sentiment shift from a month ago suggests we could see a bounce – but ‘buy the dip’ will only prevail if investors think the US outlook hasn’t fundamentally changed. We must stay level-headed. Companies themselves aren’t yet signalling earnings deterioration, even if macroeconomists are.

European stocks sold off too, having previously been unscathed. It’s a recognition that a slowing US and sharp Trump tariffs hurt everyone – regardless of the growth boost from defence spending. The previous European rally still has room to run (the dollar is still historically expensive) but there may not be as much room for fiscal expansion outside Germany as hoped. The UK is a case in point: Downing Street is signalling spending cuts to fund defence, rather than new borrowing. We also shouldn’t be surprised if the Spring statement includes extra tax rises.

Markets are still focussed on the US and Trump, not just his tariffs but his spending cuts – which are now clearly impacting Americans’ confidence. We argued before that Trump is likely respond with stimulative policies, and progress is being made on his “big, beautiful bill” of tax cuts. But things could get worse before they get better, if Trump picks an unnecessary fight with the Federal Reserve. Still, the US fundamentals are still strong, even if the sequence of policies has damaged confidence.

At the bottom-up level, analysts think profits will be strong, and these should be helped by tax cuts and deregulation. In these challenging times, investors should focus on the fundamentals. This is especially so for investors buying in now at a discount. To quote Warren Buffett on stocks and bonds: I like buying quality merchandise when it is marked down.

Trump’s best laid tariff plans
With Trump’s tariffs now in place, the media spotlight has focussed on a paper from White House economic adviser Steven Miran, which explains their rationale: “A User’s Guide to Restructuring the Global Trading System”.

Miran’s central point is that the dollar’s reserve status makes it unnaturally strong, rendering US exports uncompetitive and destroying American industry. He thinks tariff threats can get concessions from other nations because of this. But Miran also argues that tariffs wouldn’t cost consumers because they make the dollar stronger (as money goes into the US to build production) and neutralise costs. That’s the first stage of the plan, but the endgame (once short-term cost impacts have worn off) is a “Mar-a-Lago Accord” to artificially weaken the dollar and address what Miran thinks is the underlying cause of the US trade deficit.

The plan has so far tripped at the first hurdle: the dollar is weaker, not stronger, because exchange rates are more about capital markets (who are scared of Trump’s restrictive policies) than trade. Miran assumes American economic and currency supremacy is fixed – but the US’ economic strength comes from the very openness that his administration is now trying to close. This isn’t just a Trump phenomenon; global central banks have been diversifying away from the dollar since Biden froze Russia out of the dollar payments system.

Miran’s theory is debatable, but the biggest problem is its implementation. The paper explicitly says that a tariff plan needs transparency and consistency, but Trump’s will-he-won’t-he approach is the exact opposite. Tariffs are just one part of Trump’s agenda, and the other parts (deportations, forcing Europe to build its military, cutting off China) plausibly work against the tariff plan. Unpredictability is a feature of Trump’s “art of the deal”, not a bug. But complicated trade plans and short-term manoeuvring do not mix.

Will private equity problems stay private?
It hasn’t got much attention amid the current US market sell-off, but the big private equity (PE) firms are doing very badly. PE has always been correlated with small and mid-cap stocks – since PE firms usually buy up those size companies and sell them on years later. US growth expectations (and hence earnings expectations) have deteriorated, so you would expect PE to have a harder time. But the interesting thing is that PE firms’ price-to-earnings valuations have fallen sharply – by a similar margin to the technology mega-caps. This suggests that markets’ fears about US growth are even more pronounced in PE than listed equity.

This seems to be about liquidity troubles, not just growth fears. Monetary policy is still historically tight, and PE’s assets under management contracted in 2024 for the first time since 2005. PE managers are now branching out to retail-oriented sources like ourselves to offer their products, because the traditional PE money (wealthy families and pension funds) is harder to come by. The liquidity squeeze isn’t huge, but it has been enough to stifle PE activity – and it is now hurting the share prices of the biggest firms.

The important thing to watch will be whether these problems spread beyond the PE sector. PE’s growth over two decades has distorted stock markets by buying up small and mid-cap companies at high valuations – and the process has been largely debt-fuelled. The PE expansion has been able to continue for so long because the money has kept flowing in – but that is no longer true. The contraction could just be a blip, but we have been concerned about the risks PE poses to the broader system for a while. The fall in PE firms’ shares isn’t an alarm bell, but it’s a warning. We hope private equity’s problems stay private.