Market Comment - April

For the majority of humanity, it was hard to avoid what had happened to global stock markets during the month of April. The omnipresence of financial news, within the news cycle across all media, had its source in the release of Donald Trump’s tariff rates, which apply to a seemingly unending list of countries across the globe. While the President, just a couple of days earlier, promised to be kind, the numbers released by the new administration came as a shock to the financial world. Subsequently, the S&P 500 fell 12.50% over 4 trading days, which is the 4th biggest decline since 1950. The Dow Jones Industrial Index fell 9.30% over 2 trading days, and crude oil fell 13.60%, having seen its biggest 2-day decline in history.

On April 10, the S&P 500 was 0.50% away from triggering the NYSE circuit breakers, meaning trading would be halted for 15 minutes. After the new administration realized what a fiasco it had created, it reshaped its tariff strategy, with the exception of China, which saw its tariffs spike to a total of 145.00%. Unfortunately, the market did not like that news either. Subsequently, by the end of the month, Donald Trump put the Chinese tariff into question as well. Currently, 10.00% tariffs apply to all countries. The exception remains China, where 145.00% tariffs are set. Regardless of where the trade policy eventually settles, it will contribute to a growth slowdown. Still, the market liked the US President’s capitulation, and it started to rally strongly. Following a major wave of panic selling, markets always stage a comeback. Regrettably, the uncertainty about the future of the world economy remains.

The crux of the matter is the US tax cuts. Those need to be financed. At first, it looked like DOGE would do the job, but apparently, the “at least USD 2 trillion” of cuts, the Department of Government Efficiency promised, got stuck at around USD 160 billion, while the BBC claims that less than 40.00% of this figure is broken down into individual savings. Savings with a receipt attached amount to USD 32.5 billion. More spending cuts are needed. Ironically, the new administration has already spent USD 154 billion more during the first 80 days of the year than under President Biden at the same time in 2024. At the federal level, the US spends ~USD 7.1 trillion annually, but it only takes in about ~USD 5.2 trillion in taxes, so it currently runs a deficit of ~USD 1.9 trillion a year at a point in time when total debt stands at USD 37 trillion already. This debt exceeds the GDP, which stands at ~USD 29 trillion. Historically, when the debt-to-GDP ratio rises above 125.00%, bad things tend to happen. The US is at 122.00%.

Tariffs, no matter how you look at them, are a consumption tax. Cutting taxes on corporations, which are the main beneficiaries of the USD 5.3 trillion tax cut, while hiking taxes on the consumer, who is responsible for 68.10% of US GDP, does not sound like a great idea to begin with. The framework of the current US administration’s plan got so hated that even so-called “safe assets” like the US Dollar and US Treasury Bonds started to sell off. This was when things got scary. Decreasing tax revenues, a devaluing US dollar, and a slowdown in global trade aren’t incentives for investors holding US debt. Moreover, a falling US dollar exacerbates the losses for foreign investors holding that debt. While the US imports a lot of goods, those are paid in US Dollars, and the recipients not seldomly buy US debt with that cash flow. The US Treasury faces a USD 9 trillion debt refinancing during the next 8 months. Cutting off foreign buyers will not be well perceived by the market. Price action in government bonds and the US Dollar very much reminded investors of the days when Prime Minister Liz Truss was in charge in the UK, witnessing her economic plan spark a bond and currency panic in the British Empire.

During the past years, the strong outperformance of the US economy has led economists to explain it with “US Exceptionalism.” Looking at the data collected above, it seems that this exceptionalism was simply deficit spending and debt building, which obviously cannot continue as it has for decades. Will the end of deficit spending mean the end of “US Exceptionalism”? Donald Trump’s “big beautiful” tax bill isn’t a deal done yet. Also, the news cycle changes very rapidly. We should hold on to our hats. Failure of the US government to provide a sustainable budget will lead to a sovereign debt crisis.