During the month, the ASX dropped about 3%, following the lead of the US with the S&P500 down 4.5%. However, the market has rallied off its low point for the month, down 8.2% at the time. Leading the drop in the US the mega-cap technology companies traded lower following a strong prior period. The NASDAQ was down 6% for the month.
The market fears uncertainty, we are getting this from the Trump administration. A large impact of tariffs is the time taken for companies to develop strategies in response to policy announcements, only to have those changed soon thereafter. This is a common bargaining tool for Trump which we have seen before, starting negotiations with his best possible outcome and then walk back from there. The next phase should be positive for the market, assuming this is a negotiating strategy and not firm policy.
The psychological impact of a financial loss is generally considered far greater than that of a gain, a phenomenon known as “loss aversion”. The market has only dropped slightly; however, the feeling is of a far greater impact. Underlying all this is a reasonably resilient economy, supported by jobs growth and a manageable level of inflation. As Jim Chalmers outlined in the budget, “Recent outcomes for inflation and unemployment have been better than expected, and the near-term outlook has improved on both fronts. A soft landing in our economy is increasingly likely.”
In the US, consumer confidence has been hit by fears around the impact of tariffs, particularly on employment and inflation. The fear is of stagflation, with stagnant growth plus high inflation. However, the current rate of US unemployment is only 4.1% and inflation is 2.8%. Wage growth remains at around 5%, which is an overall positive for the US consumer who accounts for 70% of US GDP. Given the US accounts for 26% of global GDP, the US consumer is very important to the global economy.
The United States and Australia boast one of the closest economic relationships in the world, with bilateral investment totalling $1.6 trillion. Australia does not have tariffs on goods from the US. This should be a reasonable bargaining chip in any negotiations.
Alex Leyland
Alex.leyland@leyland.com.au