The prevailing tone on the stock market this year has been caution. This has been particularly evident in the US, where the economy has weakened due to the negative confidence effect of President Trump’s policies. But there has not been any real panic yet, which suggests the current sell-off may have a little further to go.
The VIX index, a measure of investor unease, peaked at 28 a week ago. It has since declined to 22. In genuine panics, the VIX typically reaches the 30-40 range.
Fundamentally a deeper sell-off would probably be driven by President Trump doubling down on his tariff and other policies. Trump has so far shown few signs of backing down from imposing tariffs or from deporting immigrants. It may be that the markets will have to decline a little more before the pressure to change course intensifies.
At the same time, it is difficult to see why a severe crash or a bear market should be imminent. The US private sector is still in good shape. The federal government is laying off workers, but it makes up only a small share of total US employment. The US central bank the Federal Reserve retains the capability to lower interest rates should the economy start to slow down more rapidly than expected.
While the portfolio has been insulated from the US economic slowdown so far, it would not be beneficial for European stocks ($EUSTX50) if the US fell into a proper recession. In that case, US bonds, gold and the Japanese yen would be better investments than stocks.
I expect to see a slowdown in the US, but no actual recession. The European economy could outperform as Trump’s policies are leading European governments to counteract Trump’s tariffs and the changed US defence policy via investments and stimulus. In my central scenario, US stocks ($SPX500) go nowhere, the Tech sector underperforms, and European Value and Small Cap stocks outperform.
The portfolio is positioned for this economic scenario because despite the positive shocks experienced this year, expectations about the European economy remain average. I like to turn defensive only when everybody else is optimistic.
uk.investing.com/economic-calendar/sentix-investor-confidence-268
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Unite Group and Enel were sold, Barclays bought.