The world of finance is no stranger to a certain opportunism. “Structural changes” are announced, traded in and rediscovered depending on the latest market developments. A good example of this is the so-called exceptionalism of the U.S. stock market. Until early this year, high returns that were supported primarily by a number of large technology companies (often referred to as the Magnificent 7), were seen as proof that the U.S. market deserved the exceptionalism moniker. Valuations and government policy mattered little or nothing. But when in March and April the U.S. market was hit hardest by Trump’s trade war, all this was forgotten. And now that we have seen two months of recovery, the theme is resurrected, despite the fact that the U.S. stock market is still lagging behind the rest of the world (in both euro and local currency terms).
For investors, it is important to ignore this type of opportunism and focus on the underlying developments. For example, the first thing to note is that the global equity market denominated in euros has been all but stable for six weeks. Under the surface, there has indeed been a continued recovery in the U.S. stock market, but for euro based investors it has been neutralized by a decline in the dollar. In part this can be explained by the fact that a falling dollar has a positive effect on the foreign profits of U.S. companies. But beyond that, investors do seem to be reconsidering the dollar’s status as a safe haven.
This is probably related to President Trump’s policies. His trade war may have been paused until 9 July, but even if the current situation remains in place, effective trade tariffs rise from 2.5% to around 15%. This is still expected to slow economic growth and increase inflation. In addition, Trump continues to openly pressure the central bank to cut interest rates, undermining the independence of monetary policy. Expectations for interest rate cuts after 15 May 2026 when Fed Chairman Jerome Powell’s term expires have already risen. And finally, on the fiscal front, there is the “Big Beautiful Bill” that will sharply increase the government deficit, if approved in current form by Congress.
That financial markets have calmed down over the past month is consistent with the cooling of global growth and still very high geopolitical tensions. While the risk of a far-reaching escalation between the U.S. and Iran has decreased following Iran’s muted response to America’s attack, it remains a sensitive situation. We are keeping a close eye on the price of oil for this purpose, noting it’s a clear positive that the price fell quickly after the attack.
Looking ahead, we continue to believe that against a backdrop of heightened uncertainty related to the trade war, fiscal policy and geopolitical developments, a small buffer in investment portfolios against disappointment is desirable. And because some of those risks are specifically related to Trump’s policies, we have begun to exchange part of our U.S. exposure for Germany in our government bond portfolio. When financial markets better reward us for increased uncertainty, we will wind down our buffer.
BY: WOUTER STURKENBOOM, Chief Investment Officer