Don't just do something, sit there

Over the past few weeks, financial markets have become increasingly erratic — veering from optimism to panic and back again, often in the space of a single news cycle. It’s exactly in moments like this that clear thinking, patience, and experience matter most.

This is also the reason I’ve decided to launch W4.0 — a new investment strategy platform I’ve been working on quietly over the past six months.

If you’d like to find out more and get early access to the platform, you can join the waitlist here.

Now, on to the update.

‍

The bewildering sequence of tariff announcements in recent weeks has created an extremely stressful time for investors as financial markets have lurched from optimism to extreme pessimism and back again, sometimes in the space of just a few hours. The latest Trump announcement, delaying all but the China tariffs for 90 days (albeit that 10% tariffs will still be applied across the board), has at least created some calm and will give time for negotiations between the 60 countries targeted with the most punitive tariff rates, and indeed all other countries affected by the 10% rate, to start negotiations in earnest.

My understanding is that chaos reigns in the Trump administration currently on this issue, and maybe not surprisingly, given the scale and complexity of the announcements. A 90-day delay, which could, of course, be extended, at least provides the time and space for all parties to properly engage with each other on this important issue, and as I suggested earlier this week, gives room for a much better outcome than the one most economic commentators and markets were busy trying to quantify. I also believe that despite all of the tit-for-tat bravado we are currently witnessing between the US and China, both countries will find a way to sit down and talk themselves back from the mutually damaging position they have currently adopted.

I also continue to believe that consensual views on the likely economic outcomes of the worst-case Trump tariff measures are exaggerated for the reasons I highlighted in the webcast last Friday and repeated in the blog post on Monday.

What I still find most odd about this consensus position is the widespread conclusion that it will result in much higher inflation everywhere. My view remains that substitution effects combined with what’s happening in energy, food, and rental markets combined with slower growth will more likely lead to lower, not higher, inflation and that this will lead to lower, not higher, interest rates.

The chart below traces the Brent oil price over the last 12 months. As you can see, in the space of a few days, the price has fallen by close to 20%, and at US$62.6 per barrel, it is now under half the recent peak of just under US$138 per barrel, reached shortly after Russia invaded Ukraine in February 2022.

This chart below shows the benchmark price for UK natural gas. As you can see, it has also fallen significantly in the last few weeks.

We already know from recent bitter experience that high energy prices are the most important driver of whole-economy inflation, and that’s why I think the much lower energy prices we are seeing, especially here in the UK, will completely swamp any potentially inflationary impacts of Trump’s tariffs and indeed any other short-term influences such as higher water bills.

Focusing for a moment on the UK, it’s worth mentioning again that the MPC’s and OBR’s inflation projections are looking even more odd in the light of these recent energy price falls. My guess is that when the MPC meets to decide what to do with rates in early May, if forward curves are anywhere close to where they are now, it will have to significantly revise down its inflation forecast, and it may even fall below the 2% target in 2026. If so, the pressure on the Committee to get rates down quickly from their currently excessively high level of 4.5% will be irresistible.

In all the volatility and market confusion of recent days, I think this is what the UK gilt market is beginning to acknowledge. Today, ten-year yields are back down at 4.6%, and in my view, they will continue to fall towards 4% over the next few months. (Ten-year yields are at 4.3% in the US) If I am right, this will again contradict what the OBR said a few days ago when it revised its numbers in its Spring update. In that document, it showed ten-year gilt yields rising steadily to 5.25%. I think this will turn out, rather like its inflation forecast, to be completely wrong, again. Now, some might argue this doesn’t matter. I would, of course, disagree with that position, but one undoubtedly and unexpectedly good outcome for the UK’s embattled Chancellor will be that the debt interest calculations she used to calculate her fiscal rules headroom will be significantly too high.

As I said last Friday and again at the start of this week, it is nearly always the case that equity markets overreact to events like the tariff announcement. In recent years, they did exactly the same over COVID-19 and again over the war in Ukraine. The hysteria that overwhelms financial markets and the media is incredibly disconcerting to investors and hard to resist, especially when respected finance industry leaders describe these events as the “biggest economic event of our lifetimes”, for example.

Investors should metaphorically put their fingers in their ears and not succumb to hyperbole at times like this. Calm and considered decisions based on informed analysis are essential at all times, but especially so in these circumstances.

So, in the first instance, I would encourage investors to do nothing until they have had time to do the analysis, really think about the long-term implications of the events on their own circumstances and on the investments in their portfolios, and only then take action if it is required. In my experience, following the noisy and skittish herd in these situations is almost guaranteed to be wrong.

As for the near-term future, I expect financial markets to remain somewhat hysterical, but I anticipate a gradual return to more normal circumstances in the next few weeks. Clearly, we are dealing with a volatile President and a volatile situation, but it appears to me that some possibly wiser heads have prevailed in recent hours, and more considered decisions seem to have gained the upper hand. In due course, I believe it will become clearer that the economic consequences of these measures will be significantly less severe than was initially feared and that this turmoil will be seen as geopolitically significant but nowhere near the “biggest economic event of our lifetimes”.

As Rudyard Kipling once said, “If you can keep your head when all about you are losing theirs…”

In all of the gloom and doom that we wade through on a daily basis, and particularly so in the last few weeks, I thought that I should offer up some good news to those UK economy watchers who are so used to a diet of gloomy projections.

Last week, the ONS announced that the UK economy grew by 0.5% in February alone, a pretty remarkable outcome given that consensus was expecting growth of only 0.1%. The ONS also revised up January’s 0.1% decline to flat for the month. This means that barring a negative surprise in March, the economy is on track to grow by a “gangbuster,” as the FT put it, 0.6% in Q1. Given that the OBR’s forecast for the whole of 2025 is for growth of only 1%, maybe you can see why I am yet again, significantly more bullish than that organisation, and the MPC, which is similarly downbeat, and a not surprisingly negative consensus.

Of course, the commentary accompanying the outcome is warning that this better-than-expected growth is merely the result of British manufacturers building inventory ahead of Trump’s April tariff announcement, and, as a result, is very unlikely to last beyond maybe March. I am not so sure. If that were the case, given that the tariff announcement was so well flagged, why were forecasts anchored at 0.1%? And inventory building would hardly explain the better-than-expected outcome in services and construction too.

No, I still believe that the UK economy is in much better shape than the consensus, and for all the reasons I have been writing about for months now, is well positioned to deliver growth considerably ahead of forecasts in 2025 and in 2026 whilst inflation falls back to target.

I wouldn’t normally comment on one month’s GDP data but given the gap between forecast and outcome, and the relentless negativity we are fed on a daily basis, I thought that on this occasion it was worthy of mention.

And for the record, I continue to expect another three rate cuts this year, starting in early May, I expect the UK’s inflation rate to climb to a peak in July of about 3%, but way below the very odd forecasts from the MPC and OBR which see a rate of about 3.8% in the same month, and a growth outcome much closer to 1.5% than the 1% embedded in the consensus. Oh, and finally, the Trump tariffs which will clearly pose some significant problems for specific businesses, will not have a discernible impact on the economy as a whole, whilst lower energy prices which no one seems to be writing about, absolutely will.