History doesn't repeat itself, but it often rhymes

Over recent years, we’ve witnessed a global pandemic and a bitter war in Europe, both contributing to bouts of inflation as supply chains faltered, and governments and central banks stepped in to support disrupted economies. Despite corrections triggered by the onset of COVID and the war in Ukraine, stock markets have risen ever higher, buoyed by strong corporate earnings and optimism over the promise of new technologies.

In recent weeks, we were faced with a rapidly escalating trade war and tariff battles involving the world’s largest economic blocks, threatening to upend the international order and trigger a recession.

The parallels with a century ago should be obvious. But predicting an un-ending negative spiral would have been just as naïve as understating the acute risks to the global economy.

The S&P 500 reached its high watermark in mid-February. The sharp sell-off witnessed in the early days of April was singularly triggered by the announcement of US-imposed trade tariffs that were both broader and higher than the market had been anticipating. On Wednesday, President Trump announced a 90-day pause on most “reciprocal tariffs”, except for those on China, which increased to 125%.

Unsettled markets

The deep unsettling of markets, and rapid relief, has not been irrational for two primary reasons.

First, the barrage of trade frictions would disrupt tightly woven, cross-border supply chains that have been established over several decades and have facilitated the construction of low-cost “just in time” production models; that has potentially significant implications for corporate profitability and, hence, equity market valuations. The consequences would be long-term and profound.

Second, it raised short-term policy uncertainty on several fronts. Uncertainty is anathema for corporate investment and hiring plans, and it dampens consumers’ willingness to spend. There can be no doubt that widespread tariffs would intensify the near-term growth headwinds and raise the risk of a recession in the US and beyond. Despite the 90-day pause, the elevated levels of uncertainty generated by this trade policy whirlwind may continue to weigh on confidence.

These significant risks needed to be balanced with the positives. Importantly, the US economy was in good health as we entered this period of uncertainty, the starting point for unemployment being low and private sector balance sheets in good shape. Moreover, by virtue of how far central banks raised rates in the post-COVID period, there remains significant capacity for easing of monetary policy. If central banks can stomach the inflationary risks of looser monetary policy to boost growth, their arsenal is well stocked.

These factors set the conditions for a fierce relief rally on receipt of perceived good news, which appeared sooner than many expected with the 90-day pause announcement. The issues however are far from settled and it may not be a straight path forward from here.

What's next?

Recent days show the perils of trying to time the market, especially in a fluid, unpredictable political environment, where prices can move swiftly on new data.

Some of the strongest rallies have occurred in the immediate aftermath of sharp drawdowns. Our research at Goldman Sachs shows investors who had remained invested in US equities since 1990 through to the end of 2024 – through good times and the multitude of bad – may have seen their portfolios deliver annualised returns of up to +10.6%; for those who potentially derisked at the wrong time and missed just the 10 best trading days each year, the annualised returns may instead have been a dismal -13.2%.

The Latin terms caveat emptor (buyer beware) and caveat venditor (seller beware) have seemed equally relevant over the last few weeks. Even considering the latest positive twist in this trade saga and the ensuing rally in global equities, for most investors there should be a high bar for making dramatic changes to long-term asset allocations and risk appetites.