Investor sentiment was notably pessimistic as the Trump administration prepared for a week of significant announcements regarding 'reciprocal' tariffs. Investors were bearish in Asia ex-Japan, Global Developed and Global Developed ex-US markets, Europe, Japan, and the US. Additionally, sentiment was negative in Australia, Global Emerging Markets (nearly bearish), and the UK. Chinese investors, who had previously been optimistic due to anticipated stimulus measures, shifted to a neutral stance in light of the upcoming tariff news.
According to Trump, "tariff" might be the most beautiful word in the English language, but for investors, it's quickly becoming an ugly one. Trump argues that tariffs are just tools for achieving MAGA goals, but like cigarettes, they can become addictive; like alcohol, they're easy to turn to; and like coffee, they pretend to boost productivity while really just increasing anxiety. You can't hold Trump's love of tariffs responsible for all the recent decline in investor sentiment, but he does, and it has, so he is.
Once upon a time, consumers felt great about America. Unemployment was down, the stock market was up, and they had positive expectations about their personal finance, business conditions, and inflation. They bought foreign made goods, went to Europe for the summer, Canada to ski in winter, watched the Olympics, and danced to Depeche Mode, Santana, and Brian Adams. Happiness was still considered socially acceptable. That was last year.
Consumer sentiment fell for a third straight month in March, mirroring investor sentiment, to hit the lowest level since November 2022.
“Consumers continue to worry about the potential for pain amid ongoing economic policy developments. Notably, two-thirds of consumers expect unemployment to rise in the year ahead, the highest reading since 2009. This trend reveals a key vulnerability for consumers, given that strong labor markets and incomes have been the primary source of strength supporting consumer spending in recent years”[1].
This week, Trump has dubbed his announcement date for reciprocal trade tariffs as "Liberation Day." Meanwhile, most markets - including Asia Pacific ex-Japan, Global Developed and Global Developed ex-US markets, Global Emerging markets, Europe, Japan, and the US - are experiencing a precariously negative supply and demand balance for risk assets, making them susceptible to sharp emotional overreactions to the details in the announcement.
Until Wednesday’s announcement, investors will sit on the side lines, humming the words to Bob Dylan's "The Times They Are A-Changin'.”
"Come gather 'round, people, wherever you roam / And admit that the waters around you have grown"
“Come senators, congressmen, please heed the call / Don't stand in the doorway, don't block up the hall”
"The line it is drawn, the curse it is cast / The slow one now will later be fast"
(You have to question the originality of the time when it can be captured perfectly in the lyrics of a classic rock song…)
Tariffs are Trump's industrial policy Rogaine. The lack of concrete details on these reciprocal tariffs, however, hasn't stopped the market's powerful rumor mill since it left the field wide open for wild speculation - how high, on which products, and what does he want in return? Meanwhile, the Trump administration continues to pretend a trade war needn’t be bad for the economy. Yes, it needn’t be. But it be.
Potential triggers for sentiment-driven market moves this week[1]
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US: Manufacturing and Services PMI data, March Jobs report, and Fed Chair Powell speech.
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Europe: Eurozone inflation data.
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APAC: Manufacturing PMI data for China, Tankan survey for Japan, and RBA interest rate decision for Australia.
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Global: “Liberation Day” and Trump’s reciprocal tariffs.
Note: green background = bullish, red background = bearish
Changes to investor sentiment over the past 180 days for the ten markets we follow:
How to Interpret These Charts:
Top Charts:
The top charts illustrate the ROOF ratio, which represents investor sentiment. This ratio is depicted in green on the left axis, while the cumulative returns of the underlying market are shown in black on the right axis. Key reference lines include:
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A horizontal red line at -0.5 (left axis), marking the threshold between negative sentiment (-0.2 to -0.5) and bearish sentiment (< -0.5).
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A horizontal blue line at +0.5 (left axis), indicating the boundary between positive sentiment (+0.2 to +0.5) and bullish sentiment (> +0.5).
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A horizontal grey line at 0.0 (left axis), around which sentiment is considered neutral (-0.2 to +0.2).
Bottom Charts:
The bottom charts display the levels of risk tolerance (green line) and risk aversion (red line) within the market, representing investors' demand and supply for risk, respectively. Key insights include:
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When risk tolerance (green line) exceeds risk aversion (red line), more investors are willing to buy risk assets than there are investors willing to sell them at the current price. This scenario forces risk-tolerant investors to offer a premium to entice more risk-averse investors to trade, thereby driving markets upward.
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Conversely, when risk aversion (red line) surpasses risk tolerance (green line), the market dynamics reverse.
The net balance between risk tolerance and risk aversion levels is used to compute the ROOF ratio shown in the top charts, reflecting the sentiment of the average investor in the market.
Blue Shaded Zone:
The blue shaded zone between levels 3 and 4 for both indicators signifies a reasonable balance between the supply and demand for risk in the market. When both lines remain within this blue zone, the market is considered ‘emotionally’ stable. However, when both lines move outside this zone, the significant imbalance in demand and supply for risk can lead to overreactions to unexpected news or risk events.
[1] If sentiment is bearish/bullish, a negative/positive surprise on these data releases could trigger an overreaction.
[2] University of Michigan Consumer Survey.
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