Significant stock dips: Uncertainty impacts risk appetite
The American stock market has fallen over 9 percent in the past three weeks. The decline is primarily due to the prospects of an escalating trade conflict following Trump's tariff threats. This has created uncertainty among investors, who have quickly reduced their risk appetite and increased their caution. This is according to PFA's chief strategist, who, despite the turmoil, still sees opportunities for positive returns ahead.
It has recently been difficult to spot the 'golden age' that Trump promised when he took office as president in January, at least if you look at the stock markets. While the markets responded positively to his election victory, all the gains since then have now been wiped away—and then some.
"The American S&P500 index has fallen by 9.3 percent in recent weeks, thereby erasing the value created in the wake of his victory. It has happened quickly and can seem dramatic, but the decline is still within the normal range considering the strong progress we have experienced since October 2023, where American stocks have risen by 35 percent until now," says PFA's chief strategist, Tine Choi Danielsen.
With such large gains, according to the chief strategist, it doesn't take much negative news to trigger selling reactions among investors. And here, Trump's aggressive tariff policy has certainly not helped.
"Trump's belief in the strength of tariffs and duties is in no way shared by investors, who see them as a threat to growth both in the USA and the rest of the world. And while Trump was very attentive to negative market reactions during his first presidential term, he seems less receptive this time. This has surprised many, and it's a significant explanation for the large drops we've seen," says Tine Choi Danielsen.
Uncertainty amplifies negative market reactions
She also mentions that Trump's trade policy, in addition to potentially negatively affecting growth, has also created increasing uncertainty and unpredictability, as tariffs are part of a larger negotiation tactic that can be difficult to understand and predict the consequences of.
"Markets generally dislike uncertainty, which is a natural companion to the policy that Trump has pursued, where tariff threats are brought up one day and gone the next. It's difficult to act when visibility is so low, and this has caused the risk appetite we've seen among investors for a long time to be replaced by a very high degree of caution," says Tine Choi Danielsen.
According to the chief strategist, the psychological component is therefore also an important part of the explanation for the recent rollercoaster ride, as the economy in the USA and globally still looks robust.
"American companies are still making good money, unemployment is low, and there is still a prospect of stable growth depending on how aggressively Trump moves forward with his tariffs. A similar picture is emerging in Europe. Growth is lower here, but the desire to stimulate the economy has grown—not least in Germany, which is Europe's largest economy. So, I think there is good reason to stay calm, even though we have had some tough weeks in the markets," says Tine Choi Danielsen.
She assesses that there are still positive returns to be had in the remaining year but informs that PFA has in recent months taken home some of the gains from the overweight of stocks they started the year with. This means that PFA now has a neutral weight of stocks, i.e., the weight that over time is expected to characterize PFA's investment portfolio.