4 hours Ago By Tom Nicholson
This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from The i Paper. If you’d like to get this direct to your inbox, every single week, you can sign up here.The US stock market doesn’t like Donald Trump’s tariffs.
That’s plain enough, with a plunge in values on Monday and only a modest recovery since then. Their most important share index, the S&P500, is down nearly 5 per cent so far this year, whereas our FTSE100 is up more than 3 per cent.But does this matter? Does what American shareholders – as opposed to voters – think matter? And how might a sustained fall in US share prices, if that is indeed what will happen, affect the rest of us?To put the past few days in perspective, Trump came into office after a long boom both in equity prices and in the economy itself.
The S&P500 has more than doubled since the dark days of the pandemic five years ago, and the US has shown the fastest recovery of the G7 since then. So at some stage there was bound to be a reaction. if(window.
adverts) { window.adverts.addToArray({"pos": "inread-hb-ros-inews"}); }As it happened, Trump’s own bombastic personality gave an upward kick to share prices after his inauguration, with the S&P500 peaking a month ago.
Then the markets flipped. The trigger was likely the tariffs, and the way in which they were being imposed on Canada, whose economy is closely integrated with that of the US. But they were probably always going to have a reaction, not only because they had risen so quickly, but because of growing evidence of weakness in the economy itself.
A mood-killerThere has been a lot of publicity about the economic model of one of the constituent banks of the Federal Reserve System, the Atlanta Fed, which estimates that the economy has shrunk at an annual rate of 2.4 per cent in the first three months of this year.But there are other signs of weakness, for example in the housing market, and in retail sales.
The layoffs of government employees have put a further dampener on the mood of consumers. So while the actions of the President have made matters worse, some sort of hangover after the party mood he inspired was always likely.Does it matter? There are two ways of looking at this.
One is to say that markets have always had their mad moments after a few good years and have a “correction”, that’s a 10 per cent fall from their peak, or head into a “bear market”, a 20 per cent decline. What is happening now is completely normal, though we can’t yet, of course, know how sharp this decline is going to be.if(window.
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adverts) { window.adverts.addToArray({"pos": "mpu_tablet_l1"}); }For what it is worth, Goldman Sachs has just cut its year-end target for the S&P500 to 6,200.
That compares with a current level of around 5,560 and an all-time high of 6,147 three weeks ago. So basically, they are expecting only a modest recovery this year. Nothing terrible, but nothing great either.
Vicious cycleThe other way of analysing what is happening is to point out how weak share markets feed back into confidence and thereby undermine the real economy still further. The falls in the main share indices conceal much sharper declines in individual companies. There’s a calculation that the shares of 40 per cent of the corporations in the S&P500 are already in a bear market – 20 per cent down from their peak.
#color-context-related-article-3581203 {--inews-color-primary: #F88379;--inews-color-secondary: #FEF2F1;--inews-color-tertiary: #F88379;} Read Next square ISAS Cash ISA reform to go ahead despite stock market jitters - what it meansRead MoreIn some extreme cases such as Elon Musk’s Tesla, they were trading down to half their peak on Monday. Six of the so-called Magnificent Seven high-tech giants are down so far this year, with only Meta Platforms, owner of Facebook, up on their 31 December level. The biggest of all, Apple, is down more than 10 per cent, and the next two in size, Microsoft and Nvidia, are both below the $3trn (£2.
3trn) mark.Share prices affect the mood of consumers in the US, rather in the way that house prices affect people in the UK. More than half of all American households have retirement plans where they have a savings pot that is invested and they can see its value.
The average balance in 2022 was $334,000 (£257,000)), and given the rise in the markets since then must be more than $400,000 (£308,000) now. As the S&P500 has fallen by nearly 10 per cent in the past three weeks, they can see now they are suddenly the thick end of $40,000 (£30,800) worse off. That puts a bit of a dampener on their spending.
When America sneezesAnd on this side of the Atlantic? Share values don’t have such a direct impact on the economy as they do in the US. Look at the way the German economy has shrunk for two years, but the DAX index in Frankfurt is close to its all-time high despite everything. There is the adage that when America sneezes Europe catches a cold, but that is more about the US economy than about its share markets.
On the other hand, a lot of UK investors hold shares in American companies, so a real collapse of the markets there would damage us too. As for tariffs, no one knows what will happen. The general view of US business seems to be that the confusion is damaging but eventually things will be sorted out.
As far as the UK is concerned, the impact will be marginal as most of our exports to the US are in services, or goods (including armaments) that are outside the scope of the tariffs at least so far.But it is hard to see any positive impact from this shift in US policy, and if there is a share price crash there it would be naïve to think we will not be caught in the crossfire. If that happens remember this: on a very long view, a crash in share prices has always proved a buying opportunity for the brave.
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addToArray({"pos": "mpu_tablet_l2"}); }Need to knowThe fact that more than half US households – 54 per cent, in fact – have pension pots invested in the markets raises a string of intriguing questions for us here. For a start, I have found it quite hard to get a comparable figure for UK households. There are good data on household wealth, though the numbers come out terribly late.
The Office for National Statistics came out in January with data from April 2020 to March 2022, so a period that ended three years ago. It can’t be that difficult to produce more timely results. There are numbers on pension wealth there, but it took a Freedom of Information request by RBC Brewin Dolphin to unearth the fact that the largest individual pension pot in the UK was worth £11m.
It’s depressing that most people don’t know how much they will need to retire comfortably, and that apparently most people with occupational pensions don’t know the value of their pot. I feel we could learn a lot from America here, in particular finding a way for everyone with an occupational pension to know instantly on their phone the market value of their pension savings and entitlement. All right, it may not be refreshed every second, but certainly every 24 hours.
Some of us can do this now with the value of our SIPP, but only if the folks who manage the pot have a computer system that updates after markets close.The next issue is whether Rachel Reeves’s attack on pensions – by including them in people’s estates, and thereby making them liable for inheritance tax – will reduce the amount saved in them. It’s another two years before that change cuts in and many savers may reckon that this will be reversed by the next government, so will simply press on.
But failing that, people who have already retired may feel they should run down their pots rather than reinvest the income. At the margin, this must undermine equity investment, though it’s one of those things that no one can estimate ahead of the event.This leads to a wider point.
What can be done to increase public awareness of the importance of saving and investment? There is the cash ISA row, which we have looked at here. But that is really a negative debate, about how to protect the present system of cash ISAs, rather than a positive one about investing in equities. if(window.
adverts) { window.adverts.addToArray({"pos": "mpu_mobile_l3"}); }if(window.
adverts) { window.adverts.addToArray({"pos": "mpu_tablet_l3"}); }Back in the 1990s there was the ProShare plan, which still exists but is about people buying shares in the companies for which they work.
I can see the argument for that, but I don’t feel it is a wise investment strategy to have too many eggs in one basket. After all, if your employer goes belly-up, you lose not only your job but your savings too. What really has to happen is that we must find ways of teaching people about three things: the power of compound interest; the much higher returns on equities than on bonds; and the need to spread investment risks.
I can’t see it being the instinct of this Government to do any of that, particularly advising people to invest in equities rather than gilts.But as the UBS Global Investment Returns Yearbook 2025, which is just out, reminds us, over any long period equities always outperform bonds. You can download a summary here and I would urge everyone to do so.
It goes back to 1900, a long enough period to show how investment truths have not changed, despite world wars, depressions, banking crashes and so on. This is Armchair Economics with Hamish McRae, a subscriber-only newsletter from The i Paper. If you’d like to get this direct to your inbox, every single week, you can sign up here.
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