April Market Review

April was as close to a roller coaster ride as you can get with steep ups and downs.

• S&P 500: -0.76%.
• Nasdaq: +1.52%.
• Stoxx Europe: -1.21% Stoxx Europe: -1.21
• All Country World Index EUR: -3.84% (the dollar fell by 4.71%, so in dollars the rise is 0.87%).
• Global Fixed Income Index EUR: -2.18% (the dollar fell by 4.71%, so in dollar terms the gain is 2.53%).

The final result does not say much about what has really happened in the market this month. But is that what has happened? Here is the data for the same indexes from high to low for the month.   

• S&P 500: -14.74%.
• Nasdaq: -15.56%.
• Stoxx Europe: -13.5%.
• All Country World Index EUR: -15%.
• Global Fixed Income Index EUR: -3.87%.

Thus, the April close concealed declines that invited pessimism at the beginning of the month due to the announcement of Trump’s proposed tariffs on April 2. In the first forty-eight hours after the announcement, more than nine trillion dollars of global market capitalization evaporated: the new tariffs imposed by the United States generated shockwaves in the global market. These protectionist measures are fraught with economic contradictions, especially damaging global supply chains and increasing the cost of goods for the end consumer. The rumor (later dismissed) of Jerome Powell’s dismissal only added fuel to the fire.

Source: Bloomberg

If you look at this chart, from the high of February 19 to the low of April 7, the global market as measured by the All Country World Index (ACWI) in euros fell by 23%. From April 2, the day of the tariff announcement, to April 7, the drop was 15%. It then recovered strongly (+14.64%) but is still 12% below its highs.

But let’s take it in parts:

1. The announcement of the tariffs caused panic because it could be the beginning, together with possible retaliation from other countries, of a new world economic order with strong protectionism. In addition, part of the infrastructure generated in supply chains, suppliers, etc., risked disappearing with all the investment made. This is reflected in the 15.35% drop in the graph.

2. Intentions. There are several interpretations, but some are contradictory to each other:

• Lowering the dollar to reduce the excessive trade deficit. Having some trade deficit is not negative if your currency is a world reserve, but an excessive trade deficit can lead to a constant increase in debt to continue financing it. I think exporting more, less about the currency and more about the quality of the products, although it helps.

• To finance the American government by assuring that trillions of dollars would come from other countries and thus cover the lowering of taxes, but really, those who pay these tariffs would be the American citizens if these goods are necessary (more or less inelastic demand) and there is no infrastructure to produce them internally.

• Bring more manufacturing jobs to the U.S., but the U.S. stopped being a manufacturing country long ago and became a value-added service economy. Reindustrialization of the country does not happen overnight.  

• Negotiation. But if it is a negotiation, then the two previous points would be invalid if it is agreed to lower tariffs worldwide.

Note that this has been said by members of the U.S. government, and therefore adds more uncertainty.

3. Temporary suspension of tariffs. Trump announces the temporary suspension because he says that several countries want to negotiate. Good, but it is also possible that this announcement created absurd situations, such as, for example, several cargo ships stopped waiting to enter American ports because of the uncertainty of tariffs. In the graph, it corresponds to the final rise of more than 14%.  

I think we are far from seeing the end of this situation, although it is true that decisions are being taken in the right direction. In any case, following an article by Professor Aswath Damodaran, the evolution of the different assets during this month may be telling us something important about what is happening.    

1) Equities: This asset moves with much more virulence because it is the most liquid, i.e., it can be bought and sold quite quickly (there are shares that are more liquid than others). When the investor smells something he does not like, it is the first thing he sells and that is the reason for the initial fall. Then it recovers strongly and quickly because the situation is analyzed more rationally. It is true that the profits of global companies depend on a healthy international situation.

2) Government bonds: These tend to be risk-free assets, especially US government bonds. As it is risk-free, historically it has been a safe haven asset, i.e., when risks in economic growth were perceived, investors parked their money here waiting for the downpour to pass. But this month it has moved in a similar way to equities, as you can see in this chart (equities are more volatile), why? We see it at the end.

3) Gold and Bitcoin: Gold has risen by 5.8% and bitcoin by 9.6%. They have functioned as a safe haven asset, but perhaps this is not the reason that has weighed the most in this month, mainly because bitcoin is still too young to act as a safe haven asset. Gold and bitcoin rise especially when there is a perceived deterioration in monetary policy, i.e., distrust in the currency.

4) Dollar: It is considered a safe haven asset because it is the world’s reserve currency. But the dollar has fallen by 4.5%. Now the previous point is better understood.  

5) U.S. CDS (Credit Default Swaps). The CDS is a type of insurance that pays if the bond on which it is contracted defaults, i.e. stops paying coupons. If the CDS rises, let’s say on a Microsoft bond, it is because there are investors who demand it (the CDS) because they are worried about the viability of the company in question.  Well, the CDS on US government bonds went up 38% after the announcement of the tariffs. These are not worrying levels, but they are trying to tell us something.

Source: Bloomberg

What is the conclusion we can draw?

I don’t think we are close to a recession, but these movements in the dollar, gold, bitcoin and CDS are meant to alert us to how the US accounts and monetary policy are being perceived. If, in times of crisis, investors prefer to buy gold or bitcoin rather than the dollar, it is because they are not trusting the dollar, even though it is still the world’s reserve currency.    

If you remember, one of Trump’s intentions was to lower the dollar and this month he has achieved it. Were all these movements foreseen? I find it hard to see it, but anything is possible with Trump.

I think it is not worrying because the United States will continue to be the first economic power whose currency is and will continue to be the world’s reserve currency, but an excessive trade and fiscal deficit has its consequences, especially when you depend on debt to finance it.

What are the implications for investment? 

I don’t know who said that the stock market is the only sector that when there are sales, people run away, but he is absolutely right. The great manager Howard Marks said that financial markets work like a pendulum that swings between greed and fear. We have had a few years where the pendulum has swung to the greed side and this year it seems to be swinging to fear, but lazily. The pendulum swings constantly but always passes through the middle which is what we call in the financial markets reversion to the mean, what does it mean? That any excess tends to return to the mean and therefore susceptible to sell if it has risen in excess or buy if it has done so in the fall. The best of all this is that the average in the stock market is an ascending line, therefore, it would be necessary to identify which assets are the best so that when they fall, to be alert and to buy them.      

With the excuse of what has happened this month, it is possible to explain how investment works, especially in listed companies, the stock market and in the long term. Equities are the most profitable asset in the long term, but they must tolerate continuous ups and downs. If the secular trend is upward -and history corroborates this-, strong jolts are, paradoxically, the time to keep calm and, with the analysis done, take advantage to buy companies or quality funds at better prices.

Finally, I would like to refer to the historic blackout that took place in Spain on April 28. Many speculations have been made, starting with possible cyber-attacks, but it seems that in the end, it all has to do with the excessive dependence on renewables that have been somewhat forced into Spain by European prescription. I am no expert, but from what I have read, if there is no balance of generation between the different energy sources when there is a deviation in demand and/or supply, dependence on renewables that do not generate continuously can cause blackouts, as Red Eléctrica itself said in its annual report in the section on risks: “Generation disconnections due to high penetration of renewables without the necessary technical capabilities for adequate behavior in the face of disturbances[1]”.

We know that we cannot foresee what politicians are going to say, they usually seek to win the next elections and offer what they believe the people want, and many times these are not the right decisions because of the long-term consequences. We have two clear examples: Spain and the United States.

Once again, it is shown that it is very difficult to try to know what is going to happen in the economic environment, so the best option is to have analyzed the assets that we believe are good investments, as long as we buy them at good prices. And above all, be patient because situations similar to those experienced in April will come, and in many cases, they will be more pronounced falls that will turn a good asset into a good investment when its price falls.

For the last Market Review, click here.

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[1] Redeia’s Annual Report