Markets in focus – A look back at March

In our usual monthly market update video, our CIO Richard Flax shares his views on what moved the markets in March. Watch the full video to learn more about our take on the key themes shaping markets right now.

March has been a difficult month for equity markets, with global equities falling around 6%. US trade policy was very much the focus of attention, with a constant stream of news on tariffs being introduced, delayed, withdrawn and introduced again. The final outcome remains unclear.

This month we might have a better idea of where US tariff policies have settled and how their trading partners have reacted. If you’d like to learn more about the latest developments on tariffs following what many are calling Trump’s “Liberation Day”, you can explore our insights in the latest edition of the Asset Allocation Observatory.

We think there are a few reasons behind this weakness. First, investors view tariffs as a tax – something that will likely impact demand and economic growth. Second, investors typically don’t like uncertainty. It might be effective in a negotiation, but it makes investors nervous. At the same time, business executives find it difficult to make decisions when they aren’t sure what the playing field will look like.

The other focus of attention over the past few weeks has been in Germany, where the government looks set to significantly expand its spending on infrastructure and defence. That’s partly a response to announcements from the US government that it expects European countries to take on more responsibility for European defence. But it also reflects a desire to use infrastructure spending to reinvigorate German growth, after years of stagnation.

It will take some time to see just how much the government spends, and the impact it has, but this could represent a real shift in the outlook for German growth. The immediate impact however has been for German government bond yields to rise, as investors digest the prospect of increased borrowing, albeit from pretty low levels.

There’s always a lot of data points to choose from, but this month the team has particularly focused on surveys of consumer inflation in the US. Back in November, according to a survey from the University of Michigan, US consumers expected inflation in the next year to be around 2.6%, getting close to the Central Banks target. In March that figured had jumped to 5%. 

That’s interesting for a few reasons. First, it suggests consumers are also worried by the constant newsflow on tariffs. They’re expecting to see higher prices in the stores as a result. Second, we haven’t really seen these concerns reflected in government bond yields. Two year yields in the US have generally drifted lower over the past month or so. It’s possible that investors believe that any jump in inflation due to tariffs will be short-lived, maybe offset by slower growth. 

One question we get a lot is around the outlook for US economy, which has really helped to drive global growth over the past couple of years. Obviously at the moment there’s a lot of uncertainty – not just on the tariff side, but also in terms of fiscal spending. The US government has run fairly large fiscal deficits over the past few years, and that’s helped support growth. The Trump administration is keen to reduce those deficits. That might be good news for US government debt, which has been steadily rising, but we might see slower growth as a result. 

So far, however, the US economy still seems in decent shape. The most recent data releases have come in more or less where analysts expected. That said, we do expect to see a slowdown over the coming quarters. Could that lead to a recession? At the moment, we don’t think so, but it’s something we’ll continue to monitor.