CIO Insights: The long view on “Liberation Day”

10 minute read

Markets have struggled to assess the economic impact of the Trump administration's trade policies following its April 2 announcement of reciprocal tariffs – which was itself followed by a series of escalations and reversals.

If past patterns hold, we've probably moved beyond the initial upheaval of Trump's tariff announcements. What lies ahead is likely a prolonged negotiation process with significant implications for growth, inflation, and asset allocation.

In this month’s CIO Insights, we assess the developments following "Liberation Day" and examine whether they signal a turning point for the global economy and markets.

Key takeaways

• While tariff turbulence may have peaked, markets will likely remain volatile. Trump's 2018 tariff playbook featured aggressive initial moves followed by extended negotiations. With bilateral trade discussions now in progress, we've entered that second phase – a process that may be long and complex. Nevertheless, signs of the market starting to bottom out might emerge once volatility subsides, earnings downgrades are more fully priced-in, and/or once we see more decisive policy responses – whether that means more definitive announcements from the Trump administration, or more forceful rate cuts from the Fed.
• The events of the past few weeks have given us more insights into the longer-term implications of the “FAT” framework we laid out in our 2025 Macro Outlook. Fiscal expansion is no longer just a US story: both China and Europe are stepping in to counterbalance trade headwinds. Meanwhile, China’s “DeepSeek moment” and rising tech nationalism suggest that global investment into AI is only set to accelerate. And with Trump’s policies calling the US’s credibility and policy direction into question, the idea of US exceptionalism is being tested. 
• Three key investment implications emerge from these market and macroeconomic developments. First, longer-duration fixed income may underperform unless recession risks intensify, with short-duration bonds and other balancing assets like gold more appealing alternatives. Second, there is  a rising likelihood that the US dollar could weaken given  stretched valuations and shifting macro dynamics – with knock-on effects for global assets. Third, these recent events are likely to reinforce continued and accelerated global investment into AI.

The tariff aftermath: Where are we now?

The past few weeks of Trump tariff announcements have been tumultuous for markets. Yet as we noted earlier this month, this scenario follows a familiar pattern. During President Trump's first term, tariffs were also a cornerstone of his economic policy – particularly with China. Those tariffs triggered similar market volatility as investors tried to assess their economic impact. 

With the initial shock of Trump's trade policies behind us, we can look back to his approach in 2018 for insights into what might come next:

• Phase 1: Liberation Day. Drawing from Trade War 1.0, illustrated in Chart 1 below, Trump’s initial shock-and-awe policies were designed to bring opponents to the negotiation table.
• Phase 2: Negotiations. More than 70 countries are preparing for bilateral talks over the next 90 days, suggesting that this next phase will likely be a lengthy and complex process. With policy uncertainty still high and sentiment fragile, the stream of headlines surrounding any developments are likely to contribute to sustained market volatility.
• Phase 3: Let’s make a deal. The events of 2018-19 showed how long and messy the negotiation process can be: the US-China Phase One trade agreement took nearly two years to materialise after the US’s initial tariff announcements in January 2018. Moreover, those trade tensions unfolded alongside other major events back then, like the Fed’s rate hikes and balance sheet runoff.

Nevertheless, we believe that peak tariff-induced volatility (as measured by the VIX – more on that below) may have passed, driven by two key factors:

1. Declining public support, with Trump’s net job approval down 16 points (1) since he took office in January; and
2. Bond market turbulence, with long-term bond yields surging as Trump’s trade policies spurred concerns over US debt sustainability (more on that in a bit, too).

Both factors have likely contributed to the Trump administration’s pivot towards de-escalation and transition into Phase 2 above.

Are we there yet? Signs to watch for a market bottom

Past crises have shown us that markets have always recovered – but the question now is whether the market has reached its bottom. As shared above, we believe volatility is likely to remain elevated as investors adjust to the current reality.

For signs on whether the bottom is near, this is our checklist of signs to watch:

• Volatility calming down: A sustained market recovery will likely require volatility to return to more normal levels. Chart 2 below shows the VIX, a measure of market uncertainty, is still above its longer-term average, and is still hovering above the 30 threshold that marks high volatility. A reversion to those levels could create a more conducive environment for capital redeployment – especially for institutional investors like pensions or large asset managers who have been sitting on the sidelines – and provide support for markets.

• A reset in earnings expectations: As companies begin reporting Q1 results, a lack of guidance from management will likely force analysts to cut their forward earnings estimates. As these expectations are reset, that could help establish a more credible base for investors going forward.
• More decisive policy responses: For the Trump administration, as negotiations progress, each announcement will bring more certainty, which also means their impact should diminish over time. For the Fed, a clearer path for rate cuts – whether due to weaker inflation or a weaker labour market – is also likely to boost growth expectations.

Having said all of this, timing the exact bottom is near-impossible. Rather than trying to time the turn, as long-term investors the best thing to do is to not over-trade. Instead, have a plan to deploy cash gradually, and take the opportunity that the market is offering you.

The big (economic) picture: The fundamentals are still holding up

While tariff headlines have been alarming, newsflow can be noisy and often more volatile than the underlying economic reality. So while markets are pricing in increased odds of a recession as uncertainty feeds into the “soft” economic data, the “hard” economic data suggest the US economy is still holding up, as illustrated in Chart 3.

As a result, despite recent developments, the core economic fundamentals that guide our Economic Regime-based Asset Allocation (ERAA®) investment framework remain in a regime of “Inflationary Growth.” Our system monitors a range of real-time growth and inflation indicators and would trigger a re-optimisation should the economic data deteriorate. 

Our “FAT” framework highlights the longer-term shifts

The past few weeks have also provided more clarity into how the deeper shifts reshaping the global macro landscape could evolve. As we highlighted in our 2025 Macro Outlook: “FAT” is the new normal, the forces of Fiscal dominance, AI acceleration, and Trump-era policy uncertainty remain our lens for interpreting recent events:

Fiscal dominance to accelerate as we shift toward a multi-polar world

Even before Trump, global economies had already begun shifting toward more expansionary fiscal policies. But his administration’s tariff-driven agenda is likely to accelerate this trend – prompting countries to deploy more fiscal support not just to cushion their own economies, but also to counter the trade drag from reduced US demand.

In today’s increasingly multi-polar world, where global power is becoming more decentralised, countries are being pushed to invest more heavily in building their own strategic capabilities:

• Germany, long resistant to large-scale fiscal support, passed a historic fiscal package in March. That included scrapping its “debt-brake” rule and plans for increased investment in infrastructure, climate protection, and defense. Trump’s actions could also catalyse deeper fiscal coordination in the EU – which former ECB president Mario Draghi has strongly advocated for (2). If that materialises, that could be a game changer for Europe.
• China is moving swiftly to stabilise growth momentum, with the National People’s Congress approving a ramped fiscal stimulus plan in March. That said, it’s also long been channeling its resources into industrial policy tied to AI and advanced tech. A decoupling between the US and China as a result of trade tensions is likely to further accelerate those efforts.

Artificial intelligence as the next strategic arms race

The AI race between the US and China is heating up. In our view, China’s release of DeepSeek-R1 in January – a large-language model (LLM) that rivals OpenAI’s GPT-4o but built at lower cost – was a pivotal moment, and shows just how quickly the gap is narrowing. Rising tech protectionism is only accelerating the shift, with both countries doubling down on investment in the AI ecosystem.

The “DeepSeek moment” has made clear just how far China’s AI capabilities have come and how quickly they could develop going forward. Looking near-term, the country’s top four AI firms are expected to boost capital expenditure by 38% this year.

Looking further ahead, Goldman Sachs expects (3) a much faster pickup in AI adoption in China over the coming decades, as shown in Chart 4. With supply chains set to decouple further due to Trump’s tariffs, both China and the US are likely to double down on AI investments, as neither side will want to fall behind.

Trump’s policy uncertainty is eroding US exceptionalism

Perhaps the biggest wildcard is Trump himself. His administration’s policies – from reciprocal tariffs to DOGE spending cuts – has called into question the predictability and credibility of US economic policy, especially due to his mercurial approach to implementation.

The abrupt announcements and dramatic shifts have weighed on markets. Importantly, however, the longer this uncertainty is sustained, the greater the odds that it could begin to drag on the real economy. (For more, see CIO Insights: No Pain, No Gain.)

In addition, Trump’s actions signal a willingness to decouple from allies and break long-standing norms, whether on trade, currency, or security. For markets, this raises fundamental questions: Can investors still count on the US as the anchor of global capital flows? Will the US dollar retain its “safe-haven” status?

For now, these questions remain unanswered – but they suggest that US exceptionalism, long taken for granted in asset allocation, is entering a period of greater scrutiny.

What are the investment implications of the events of Q1?

The shifts we’re witnessing in the global macro landscape has important repercussions for asset allocation. At this juncture, we see three key investment implications: 

1. Be wary of bond duration

Unless recession risks rise meaningfully, we believe longer-duration US government bonds are likely to underperform other bond sectors. For years, long-duration Treasuries acted as a reliable hedge during market stress. But in today’s environment – where fiscal sustainability of the US government is under growing scrutiny – that playbook may no longer hold.

Given these questions – including those surrounding the US$9 trillion of debt maturing this year, the need for the US debt ceiling to keep rising, and the tax cuts that the Trump administration has yet to roll out – investors are demanding higher “term premia”, or the extra compensation to hold longer-dated bonds versus rolling over short-term ones, as illustrated in Chart 5.

While still-elevated long-term yields may appear attractive, the risk-reward for extending duration remains unconvincing. In our view, prices could stay volatile, and a sustained bond rally would likely require a clear downturn in growth.

In this context, we believe it makes sense to stick to short and ultra-short duration US government bonds, and to diversify bond exposure geographically.

We also see gold as a more reliable portfolio stabiliser in this regime – which is why we’ve incorporated it as a structural allocation in our portfolios’ benchmarks. This allocation to gold has helped our General Investing portfolios powered by StashAway to stay in positive territory over the past few months as other asset classes sold off. (See our Q1 2025 Returns for more.)

2. There are rising odds of a weaker US dollar

There is a growing likelihood of a weaker path for the US dollar, especially when you consider broad valuation metrics. As illustrated in Chart 6 below, the USD’s real effective exchange rate (REER) is more than two standard deviations above its long-term average – historically, a level where upside has been limited and turning points have often followed.

Simply put, the dollar looks expensive relative to other currencies, leaving limited room for further upside. From such elevated levels, any structural shift – whether in capital flows, trade patterns, or policy credibility – could act as a catalyst for a reversal.

Here, a few forces are coming into play:

• Tariff uncertainty, which will weigh on global trade volumes and result in less demand for the dollar;
• Trump-era unpredictability, which could reduce demand for US assets and erode the dollar’s traditional “safe-haven” appeal; and
• Capital reallocation from global investors, as they reallocate their overweight positions on US-denominated assets given the uncertainty surrounding the USD and the emergence of alternative growth stories elsewhere.

Given the above, what are the implications for global portfolios? A weaker USD tends to support non-US equities, emerging market assets, and commodities. It also underscores the importance of diversifying currency exposures. In short, investors could benefit from a globally-diversified portfolio as these shifts unfold.

3. The AI arms race should support the tech sector 

Accelerating global investment into AI will continue to support the tech sector. As the US, China, and potentially Europe double down on AI as a strategic priority, that should reinforce long-term demand across the entire tech value chain – from semiconductors to software.

At the same time, the US tech sector has undergone a valuation reset. Chart 7 below shows that the recent selloff has brought US equity valuations back to their 10-year averages – and below that for the Magnificent Seven. With this re-rating bringing valuations to more sustainable levels, it creates a more attractive entry point for long-term investors.

Importantly, tech is no longer just about growth – it’s increasingly being viewed as strategic infrastructure. In many ways, US Big Tech companies have become “too big to fail,” given their central role in the economy and national competitiveness. In short, as AI becomes a pillar of economic strategy, it could help anchor the tech sector through macro and market cycles.

Our globally-diversified portfolios are designed to help you stay invested amid macro and market shifts

In an environment where changes in government policy can move markets overnight, it’s tempting to react to every headline. But as we’ve seen time and again, short-term volatility can often draw attention away from the more important structural shifts underway. 

As world leaders navigate complex tariff negotiations, one of the best things you can do as a long-term investor is to stay invested in a globally-diversified portfolio that’s aligned with your risk tolerance. This is an environment that demands disciplined investment strategy – and one that could offer opportunities to gradually put your extra cash to work. 

Our investment framework, ERAA®, will continue to evaluate the economic data and make systematic adjustments to your portfolio as needed – helping you stay invested through the uncertainty and focused on your long-term financial goals.

Glossary

The VIX index

Often called the "fear index," this measures expected market volatility based on S&P 500 index options. A number above 30 generally indicates high volatility and investor anxiety.

Term premia

The extra yield investors demand for holding longer-dated bonds instead of repeatedly investing in shorter-term ones – essentially compensation for interest rate risk over time.

Duration (fixed income)

A measure of a bond's sensitivity to interest rate changes. Longer-duration bonds experience greater price fluctuations when rates change.

Safe-haven assets

Assets that typically attract investors during market turbulence, such as certain government bonds, gold, or the US dollar.

References

1. Orth, T., and Montgomery, D. (2025). Trump job approval, the economy, stocks, tariffs, taxes, and the budget. YouGov. Retrieved from: https://today.yougov.com/politics/articles/52035-donald-trump-job-approval-economy-stocks-tariffs-taxes-budget-april-13-15-2025-economist-yougov-poll
2. Draghi, M. (2024). The future of European competitiveness. European Commission. Retrieved from: https://commission.europa.eu/topics/eu-competitiveness/draghi-report_en
3. Goldman Sachs Research. (2025). What advanced AI means for China's economic outlook. Retrieved from: https://www.goldmansachs.com/insights/articles/what-advanced-ai-means-for-chinas-economic-outlook