EMR May 2025
Dear Reader,
BACKGROUND
Before considering the economic effects of the extraordinary events of the 100 days of the Trump administration it is useful to review the politics behind the moves. President Trump is a man in a hurry, because he believes that he was significantly hampered in his first term, 2016 – 2019, and he is aware that the Republican Party is likely to lose its majority in the House of Representatives in the coming midterm elections, less than two years away. The traditional road map or an agreement in tariffs involves many months – sometimes years – of meetings by respective trade representatives, followed by a compromise, that may not satisfy all parties. Based on his limited time frame, President Trump chose to promulgate punitive tariffs and apply them immediately. This has the effect of getting everyone‘s attention and then permits him to scale back the tariffs on trade talks come to a satisfactory conclusion. The most interesting concept was his idea of reciprocal tariffs, whereby he claims that if the exporting county reduces its tariffs on US goods to zero, he will reduce American tariff to zero as well.
There is no assurance that this tariff strategy will work. Most countries seem to agree with customs negotiations. The paradox is that by a significant upheaval in the equity and debt markets – both domestically and overseas, President Trump could arrive at a genuinely free-trade global marketplace much sooner than anyone could have expected. That is the plan. In the meantime, we can expect the volatility to continue at rates we have not seen in a generation.
In early May 2025, President Trump, once again, backtracked on his earlier decision to tax several countries, announcing a 90-day suspension of his decision to introduce universal tariffs designed to affect goods and services from more than 150 countries. However, he left unchanged, the previously introduced 25 percent duties on steel and aluminum from Europe and lowered duties on goods and services exported from Europe to 10 percent. At the same time, he increased duties to 145% on goods from China, but excluding smartphones and computers. However, these tariffs have recently been reduced again to 30% and a 90-day moratorium has been agreed. China reduced its tariffs from the announced 115% to 10%.
The announcements of the above-mentioned, contradictorily applied measures, have had and continue to have a major impact on equity markets, including the US itself. The recent interventions by the US president have had a deterministic impact and, are likely to continue to reduce total factor productivity (TFP). We emphasize this aspect as currently it is not openly discussed, although in economics several factors can be identified as boosters of productivity, defined as output per hour.
In today´s context we find that labor productivity does not rise over time because workers do not have more and/or enough capital to work with, nor due to lacking and/or costly supply of imported goods and services, as much as due to unilateral and as much as due to one-sided political perilous decisions. In publicly made comments we find no clear explanation of the negative repercussions of the policy decisions by President Trump on US domestic economic activity. Therefore, let us stress and keep in mind that the policy is determined both by domestic and foreign factors; impacting economic growth via a specific lack of “induced costly” capital. In addition, US productivity does not grow over time, solely or primarily due to lacking and costly imports, but due to higher “home-made” taxation.
A further aspect, rather difficult to be assessed, concerns the impact of negative repercussions on productivity as a consequence of Trump’s taxation of compulsory imports of specific goods. Contextually, we find no assessment of the negative repercussions on domestic economic activity, and particularly on productivity. These developments do not portend a flamboyant economic recovery in in the coming quarters.
What do the daily closing data of selected equity indexes, portrayed in the following Chart, tell us about the markets´ valuations of the current political and economic outlook? Any suggestions?
The chart starts one day prior to the U.S. presidential elections of November 5, 2024. Examining closely the respective ups and downs of the shown indexes, expressed in the respective currencies and indexed to 1 on October 2024, the following may be deduced:
a) Overall, the ups and downs follow similar movements, with varying shorter-term disparities.
b) The DAX-index is shown as the overall outperformer.
c) The overall underperformers have been the NIKKEI index, followed by the NASDAQ and the SX5P indices. The disparities stress the incongruent sectoral content of each index!
d) The only index that did not lose ground, since the beginning of the period under consideration, has been the DAX-Index. De facto it is the only index that did not lose ground during the period following the Trump’s Tax-announcements.
The differential growth rates of the studied indices are astonishing indeed and at the same time quite problematic. Do these differences indicate an important and peculiar functioning of the individual national indices?
OUTLOOK
This raises the question of how to respond to the measures and decisions that are likely to be taken by President Trump in light of the unstable socio-economic situation. Would it not be much more promising to analyze the reactions of the various markets in accordance with the political and social influences of total factor productivity (TFP)? In the current context, these influences call on us to focus on innovative investments. While the focus in the US is on controlling foreign trade, we in Europe, and particularly in Switzerland, should focus on the use of ICT (information and communication technology), which contributes significantly more to labor productivity through capital deepening. We consider the focus on “taxes” to be a political stance that is unlikely to be successful, as it does not promote productivity through capital deepening. The information we gather from relevant US commentary suggests that foreign investment in the US is increasing, while it is rather difficult to find employers. The medium-term outlook does not seem to support the US government’s tax policy.
Given this situation, we are leaning toward an investment approach that under-weights US equities in favor of domestic equities and, selectively, equities from Eu-rope and Asia.
In terms of currencies, we are pursuing an approach with an overweight position in the Swiss franc and a slightly lower exposure to the euro and pound sterling. We also expect volatility to remain very high, depending on the unpredictable policies of the White House.
Suggestions are welcome.
