A buying opportunity or the prelude to a full-blown bear market?

Tom Stevenson | Fidelity International

Taxing times

This week, Donald Trump has promised to impose a new set of broad-based tariffs in his ongoing bid to reshape the global trade landscape. Unlike the levies imposed so far, these look like being comprehensive, with no concessions. Investors are running for cover.

The cracks started to show late last week when the US stock market fell by more than 2%. The sell-off deepened and widened on Monday as markets in Asia took an even bigger hit, with Japan, Taiwan and Korea down by more than 3%. Falls in Europe were smaller, but significant.

The President’s policies are unpredictable and change at such short notice so no-one is prepared to second guess what will actually happen this week. Rather, they are selling first and asking questions later. The small rally last week from the US market’s 10% correction since February has been wiped out.

The big question for investors now is whether the correction turns out to be a buying opportunity or the prelude to a full-blown bear market. Historical analysis from Goldman Sachs suggests the key to that is whether or not the ongoing slowdown in the US economy turns into a recession or not. The odds of the worst outcome - recession coupled with persistent inflation - are shortening.

What to watch for

History is not that helpful to investors deciding whether there’s worse to come. Plot all the corrections from the past and there’s a wide dispersion of subsequent returns. Sometimes markets rally, other times they take a turn for the worse.

One signal that’s so far not flashing red is so-called credit spreads - the extra income demanded by corporate bond investors over that provided by government bonds. This spread had become tight in the more optimistic days following the US Presidential election and has not (yet) widened much. In a recession, it probably will do so, and investors will watch the bond market closely for clues.

Other measures to keep an eye on include the outlook for company profits. We are just a couple of weeks away from the next quarterly earnings season, and so far, expectations remain for a continued improvement in corporate results. Last year they rose in the low double digits and more of the same is pencilled in for 2025. In the long run, earnings are the key driver of stock markets.

The level of the market is also determined by the multiple of those earnings that investors are prepared to pay. That has started to ease back. In the most expensive market, the US, it has fallen from 23 times earnings to 20 - off the peak but still high by historic standards. More worrying is the equivalent multiple for the Magnificent Seven technology stocks, which has fallen from 42 but still stands at a punchy 30. It will be hard for the overall market to hold up if tech stocks continue to retreat.

Safe havens

A key difference between today’s correction and the last big market reversal - in 2022 - is that this time around there have been places for investors to find shelter. As investors have rotated out of the US market, they have invested in previously unpopular markets like Europe and China. That has helped smooth the ride for investors with balanced, or diversified, portfolios.

Other assets have helped as well. Gold, in particular, has lived up to its reputation as a safe haven in challenging times. This week it hit yet another all time high of US$3,128 a troy ounce. As well as its port in a storm characteristics, gold is being boosted by concerted buying on two fronts. First, central banks are looking to top up their reserves with an asset that can’t be frozen or confiscated. Second, retail buying in India is rising fast as that country’s stock market runs out of steam. Indians have always loved gold as a store of value, and it is coming back into favour as share prices moderate.

Another diversifying asset that’s on investors' radars again is the ultimate safe haven - US Treasury bonds. Their yield, which moves inversely to price, has fallen to 4.2% from a recent high near 5% as investors have started to price in a growing likelihood of lower US interest rates. The US Federal Reserve is loath to cut rates in the face of persistent inflation, but investors are betting that it will have no choice if the US economy heads further towards a damaging recession.

Please note that the views expressed in this article are those of Tom Stevenson, Fidelity International.

Learn how the industry leaders are navigating today's market every morning at 6am. Access Livewire Markets Today.

All prices and analysis at 1 April 2025.  This document was originally published on Livewire Markets website on 1 April 2025. This information has been prepared by FIL Responsible Entity (Australia) Limited ABN 33 148 059 009, AFSL 409340 (‘Fidelity Australia’), a member of the FIL Limited group of companies commonly known as Fidelity International.The content is distributed by WealthHub Securities Limited (WSL) (ABN 83 089 718 249)(AFSL No. 230704). WSL is a Market Participant under the ASIC Market Integrity Rules and a wholly owned subsidiary of National Australia Bank Limited (ABN 12 004 044 937)(AFSL No. 230686) (NAB). NAB doesn’t guarantee its subsidiaries’ obligations or performance, or the products or services its subsidiaries offer.  This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice.  Past performance is not a reliable indicator of future performance.  Any comments, suggestions or views presented do not reflect the views of WSL and/or NAB.  Subject to any terms implied by law and which cannot be excluded, neither WSL nor NAB shall be liable for any errors, omissions, defects or misrepresentations in the information or general advice including any third party sourced data (including by reasons of negligence, negligent misstatement or otherwise) or for any loss or damage (whether direct or indirect) suffered by persons who use or rely on the general advice or information. If any law prohibits the exclusion of such liability, WSL and NAB limit its liability to the re-supply of the information, provided that such limitation is permitted by law and is fair and reasonable. For more information, please click here.