Just wrapped up a partner’s latest weekly report, another insightful read amid these rollercoaster markets. For active investors, the heightened volatility in the coming weeks presents both opportunities and risks. Buckle your seat belts, stay calm and carry on.
Here is a section:
The so-called “Trump slump” paused for breath last week, and the performance of regional equity markets became generally more uniform.
The “pain trade” is the tendency of the market to move in a way that causes the maximum possible pain to the largest possible number of investors. It happens when there is a very widely and strongly held consensus, such as the belief that US President Donald Trump’s second term would bring a boost to growth from deregulation and tax cuts, and that the artificial intelligence (AI) boom would continue.
In 2008, the US equity market was around 1.5 times as big as the European equity market. By the end of 2024, it had ballooned to more than five times the size. That means any rebalancing from the US to Europe can have a disproportionate impact on the latter. It pays to be aware of these technical factors in order to distinguish them from fundamentals.
Over the same period, US earnings outpaced European earnings by a similar amount. Fundamentally, US companies continue to be much more profitable than European companies and so demand a premium valuation.
Although there has been some deregulation, the market’s focus has been on surprisingly aggressive US trade policy (which seems to have few winners and many losers) and the sudden realisation in Europe that the region would need to re-arm itself.
