Trump tariff trauma has hit stock markets. The trauma hasn’t been helped by the rotation effect that comes when interest rates fall and cyclical stocks that have been hurt by high rates start to gain favour with the big fund managers who inexorably determine what shares are sold and bought. What follows is my rationalisation of what is happening now and how I’m determined to hold my nerve.
To recap, my investment strategy for 2025 was based on interest rates falling. That started on February 18. So, it’s early days but to expect an instant stock market plus would have been excessive. This hope for rising stock prices after the RBA’s rate reduction wasn’t helped by President Trump’s run of tariff calls that has even spooked Wall Street.
Let me repeat that it’s early days for the rate cuts that could number four over this year, if the CBA economics team’s forecasts are on the money. Helping me keep the faith is what we’re seeing in the US stock market where the rally has been broadening. That is the Magnificent Seven stocks that have driven the S&P 500 and Nasdaq indexes higher over the past two years have started to lose ground, though Apple remains more loved.
“Apple Inc.’s stock outperformed all of its “Magnificent Seven” peers in the month through Thursday, while Tesla Inc.’s stock performed the worst,” Morningstar’s Therese Poletti reported. “Shares of Apple (AAPL) were down only fractionally over that span, which also corresponds to when the DeepSeek news began getting mainstream attention. The other large technology stocks within the Magnificent Seven grouping have seen steeper declines, according to FactSet data.”
As these fall in share price (Tesla is off a whopping 29%!), ETFs with these stocks lose ground, even though smaller companies that are gaining favour are rising. We have falls of big cap stocks and rises of smaller cap stocks when share market rotation happens from once favoured stocks or sectors into the new stocks or sectors that are expected to do well in coming months and even years.
If the S&P 500 gains over the year, it will be driven by companies helped by lower rates. And there’ll also be AI pluses for the profits of some companies, as well as even benefits from the Trump tariffs.
At home I’ve argued that our big cap stocks (the banks, Wesfarmers, JB Hi-Fi and others that have had big rises) will suffer profit-taking and the money collected from these sales will head towards small cap and mid cap stocks that will benefit from rate cuts.
Some of this has already showed up with the ASX 200 index up 0.77% over the past six months, while EX20, which captures stocks number 21 to 200 is up 2.74%. Over the past month EX20 was down 1.4%, while the bigger ASX 200 was down 2.47%.
These are early signs that my strategy is on the money, but this is at the transitional time when the big caps are losing price, while some smaller caps are gaining. These ups and downs with these different stocks will have hit ETFs such as IOZ, which was down 2.11% for the month, compared to EX20, which was off 1.4% over the same time.
My argument is that as rates continue to fall and the world adjusts to what President Trump dreams up with his tariffs, rate cuts will capture the stock market drivers, and this should be good for smaller and mid-cap companies.
Another part of my strategy was to have speculative plays on the likes of Audinate (AD8), Megaport (MP1) and Tyro (Tyr). Over the past month, AD8 is up 15.57%, MP1 has spiked 33.17% and TYR has risen 11.39%, which isn’t bad considering they’ve endured reporting season and the Trump tariff sell-off.
These stocks are often the playthings of speculators. I’m sure Tyro in particular has players who buy around 78 cents or so and sell-off when it hits 95 cents as it did on February 26, which would be a 22% gain in less than a month.
My other play for 2025 is to be a believer in the Chinese economic recovery and what it might do for the likes of BHP and Rio Tinto. Over the past month when the overall market was off 2.47%, BHP lost 0.51% and the analysts expect a 15% consensus gain, while Morgan Stanley is its biggest supporter, tipping a 24% gain.
Coming up this month in China are the “two sessions”, which are the annual meetings of China’s top legislature, the National People’s Congress, and the top political advisory body, the National Committee of the Chinese People’s Political Consultative Conference.
This get-together in the world’s second biggest economy could be crucial for global economic growth, the outlook for iron ore prices and BHP’s stock price, with AMP’s Shane Oliver suggesting that “the potential positive of more decisive stimulus in China” coming from these sessions could be a game changer for the local share market.
I suspect Donald Trump’s poking of the Chinese bear could mean that Beijing won’t want to look like the ‘poor relation’ in 2025 and beyond, while it seeks to outdo their adversary in the White House.
