- Outcome of Trump tariffs and trade wars remain difficult to predict
- Central banks are still easing policy (slowly), but US and UK governments are leaning toward austerity, as German fiscal policy turns expansionary
- Transport, small caps and semiconductor stocks seem to fear a downturn
- Copper and commodities are rallying, gold is soaring
- Government bond yields are rising (despite interest rate cuts)
- Are markets starting to price in stagflation?
“The 2 April deadline for President Donald Trump’s much-vaunted imposition of reciprocal tariffs draws ever closer and stock, bond, commodity and currency markets continue to wrestle with the potential implications for valuations and prices,” says AJ Bell investment director Russ Mould.
“Five indicators across a range of asset classes may help investors get a feel for market thinking, what is priced in, what is not and what could happen next and right now sentiment suggests that the dreaded combination of slowing growth and sticky prices is looking like an increasingly likely outcome.
“More than a decade of unorthodox monetary policy, in the form of zero interest rate policies (ZIRP) and quantitative easing (QE), failed attempts at austerity, galloping government debt accumulation and Covid, with all of its after-effects, meant investors already had enough to ponder as they tried to work out whether inflation, deflation or stagflation would be the outcome – and that was before President Trump’s second election victory and his plan to increase tariffs to raise taxation revenues on one hand and slash government spending on the other.
“All three of those potential endgames would require a different portfolio allocation, at least if history is any guide, with inflation perhaps leaning toward select equities and ‘real’ assets such as commodities, deflation favouring cash and bonds and stagflation, the worst of all worlds, putting gold and commodities (again) in the driving seat.
“To try and cut through the day-to-day noise, to which the White House is a major contributor, investors can look at five trends across major asset classes to help judge what may be coming next, and what an ideally balanced portfolio will look like.
“They are transport stocks, small cap stocks and semiconductor stocks from equities, copper from commodities and benchmark ten-year government bonds from fixed income.”
Transport stocks: slowdown or recession
“Robert Rhea’s Dow Theory asserts that if transport stocks are doing well, then the industrials should follow. This is because a strong economy would mean robust demand for goods, which in turn would mean vendors have to replenish stocks and refill shelves so they can keep selling. Those products have to be shipped from manufacturers to retailers and wholesalers and that is where freight, truck, airline and shipping companies enter the equation.
“However, the opposite also holds true, or so the theory goes: if the transports are doing badly, then the industrials, and by implication the wider economy, could be struggling.
Source: LSEG Refinitiv data
“It will therefore be of some concern to bulls of US stocks to see the Dow Jones Transport index slide by 18% from last November’s high, to leave it on the fringes of bear market territory.
“Last week’s profit warning from FedEx was not helpful in this context, although companies’ preparations for tariffs could make spotting underlying trends tricky, as they may be building up inventory and holding back on other forms of investment in the aftermath of the Canadian, Mexican and additional Chinese tariffs and in the run-up to 2 April.”
Small caps: slowdown or recession
“Just like the Dow Jones Transportation index (and the wider US indices), the small-cap Russell 2000 benchmark initially surged after Trump’s election triumph last November, as markets embraced the Republican candidate’s agenda of deregulation and tax cuts and forgot about the tariff talk.
“The Russell 2000 peaked in November and has since dropped by a sixth, to also leave it hovering near a bear market.
Source: LSEG Refinitiv data
“Small-cap companies tend to be less well-resourced than their multi-national, mega-cap peers, and are often more dependent upon their domestic economy as a result. As such, they can be seen as a guide to trends in local output, so the slide in market minnows on both sides of the Atlantic could be seen as a harbinger of an economic slowdown.”
Semiconductor stocks: slowdown or recession
“Manufacturers of silicon chips, and semiconductor production equipment (SPE), can be a good guide to the health (or otherwise) of the global economy. Silicon chips are everywhere, from smart phones to servers, cars to robots, and laptops to smart meters and the industry’s annual sales are expected to set a new all-time high of almost $700 billion worldwide in 2025.
“The industry is cyclical, however, and subject to huge booms, driven by spikes in demand from new, killer applications (of which AI may be one), and busts, caused by surges in output as chip makers ramp up capacity or an unexpected, wider economic slowdown.
Source: LSEG Refinitiv data
“The Philadelphia Semiconductor index, known as the SOX, consists of thirty major silicon chip and SPE specialists. It may be a source of discomfort to bulls to see the benchmark sit below where it lay a year ago, for all of the hoopla surrounding AI and the SOX has dropped to more than a fifth below last summer’s peak – bear market territory.”
Copper: growth or stagflation
“The metal carries the nickname ‘Doctor Copper’ because it is seen as a dependable guide to global economic health. Copper is malleable, ductile and conductive, so it features everywhere from white goods to cars to construction.
“Worries over China’s real estate bust took a toll in 2024, but the metal has bounced back in 2025. Talk of further monetary and fiscal stimulus from Beijing could help here, as could Germany’s dash for debt-funded growth, although it may be that tariffs are muddying the outlook, as copper traders snap up supplies in case Trump imposes new levies akin to those already applied to aluminium and steel.
Source: LSEG Refinitiv data
“A further explanation is that investors are scrambling for ‘real’ assets in the view that inflation or stagflation lie around the corner and that ‘paper’ assets and promises, such as cash and bonds that can be conjured out of thin air by the authorities if they see fit, are a less than enticing proposition as a result.”
Government bonds: inflation or stagflation
“The trend in interest rates is generally downward around the world, after 193 rate cuts from central banks around the world in 2024 and another 31 in 2025 to date. As such, it would be logical to expect benchmark, ten-year Government bond yields to move lower, too, in anticipation of further reductions. Instead, the opposite is happening.
“Japan may be the outlier here, as the Bank of Japan finally starts to raise rates in the view deflation is no longer a risk after some thirty years of unorthodox monetary policy, especially as inflation is now running ahead of the central bank’s 2% target.
Source: LSEG Refinitiv data
“But the European Central Bank, US Federal Reserve and Bank of England have all cut interest rates to varying degrees, and their local bond markets have just shrugged and taken prices down and yields up in the opposite direction.
“This may reflect worries over increased supply of government debt, and it may reflect concerns over the potentially inflationary impact of tariffs. Trump and the Department of Government Efficiency are trying to head off US government spending and bring a spiralling deficit under control, so the increase in US ten-year yields may be less noticeable than that elsewhere, but the trend has still been higher, despite Fed rate cuts.
“The unpleasant conclusion from these five trends is that the global outlook is deviating from the one which markets priced in so enthusiastically in 2024, namely a return to the low growth, low inflation, low interest rate world that had worked so well for bonds and long-duration assets such as technology stocks during the 2010s and early 2020s.
“This may explain why share prices, especially in market darlings such as AI plays and the Magnificent Seven, are turning more volatile and gold is on a tear. Commodity prices more widely are firmer for choice, too, despite oil’s woes and hefty corrections in rice and orange juice, either out of fears over security of supply, or concerns over tariffs or a search for ‘hard’ assets should inflation or stagflation break out.
Source: LSEG Refinitiv data
“The CRB Commodities index has just broken above the 350 mark for only the third time in its thirty-year history, which could just be telling investors something.
“The inflationary spike of 2021-22 saw commodities outperform the S&P 500 for the first time since the early stages of the European debt crisis at the start of the 2010s, but a cooling in the rate of price increases and increased faith that central banks had the situation in hand helped put share prices back in charge.
Source: LSEG Refinitiv data
“If the environment really has changed – and we are now in an era of inflation or stagflation and not the low-growth, low-rate, low-inflation murk that dominated in the wake of the financial crisis – then it could just show up in how the CRB Commodities benchmark does relative to the S&P 500. Such a dramatic change may just favour commodities, at least if the experiences of the 1970s are any guide.”
