Monday Club – 10/03/25: Your weekly Wealthwise digest

Investment round-up

* Franklin Templeton is to offer Putnam Investments funds in the UK. The move follows the completion of Franklin’s acquisition of the business on 1 January 2024. Franklin Templeton will roll out Putnam’s equity strategies across Europe and other key regions.

* Schroders is looking to save £150m over the next three years to support “profitable growth”. It has already realised £20m of these cost savings. The group wants to broaden access in public markets and build on its wealth management track record.

* The latest Investment Association data shows outflows of £3bn in January, reversing the £2.3bn inflow seen in December. Equities bore the brunt of outflows with £2.9bn withdrawn – with UK equities particularly weak (£1.7bn outflows). Bond funds saw moderate inflows in January of £187m with specialist bond funds the top-selling sector. Index-tracking funds remained in inflow with net retail sales of £1.8bn, compared with £2.6bn in December.

In focus: US recession?

Could the US be heading for a recession? Just a few months ago, when economists were predicting a Trump presidency would galvanise the economy and send stockmarkets soaring, the suggestion would have seemed ridiculous. Yet the unpredictability of the new administration and, in particular, its quixotic approach to tariffs, has weakened stockmarket sentiment and appears to be impacting the real economy as well.

Inflation data was the first sign of trouble – coming in higher than expected for January as the CPI rose 3%, year on year, and making future interest rate cuts less likely. Manufacturing data came in below expectations, with Institute for Supply Management data showing the Manufacturing PMI receding to 50.3 in February, down from 50.9 in the previous month and behind analysts’ forecasts.

Meanwhile, the Conference Board and University of Michigan data showed US consumer confidence dropping at the fastest pace since August 2021, with consumers reporting concerns over tariffs were playing a role. Inflation expectations have risen to their highest level since November 2023 while the Atlanta Federal Reserve model has suggested US economic growth might be negative in the first quarter of this year.

There was also a weaker non-farm payrolls report, with the US economy adding just 151,000 jobs in January, while unemployment ticked up to 4.1%. This is before the impact of the Department of Government Efficiency layoffs, with the downsizing of federal workers not yet showing up in the statistics.

Bond-market concerns

The US bond yield is starting to reflect increasing concerns about a possible recession, with the 10-year bond yield dropping from 4.6% to 4.3% over the past two weeks. Again, with inflation still high, the Federal Reserve may not be in a position to ride to the rescue with interest rate cuts.

“Over the coming months, the economy will start to feel the dampening effects of President Trump’s policies,” says Luca Paolini, chief strategist at Pictet Asset Management. “So far, cuts to public spending have been modest – despite the noise – though there are indications that serious efforts are being made to trim the deficit. This could weigh on economic activity in the short run.

“And whereas slowing growth might otherwise have left the Fed inclined to trim rates, inflation is also a concern. Price pressure is coming from both strong consumer demand and rising labour costs, which companies are able to pass on. Trump’s import tariffs are only likely to add to this upward pressure. Consumers are already feeling the pinch and appear set to rein in spending, which reinforces our concerns about a gradual weakening in US GDP growth.”

All this has had an impact on stockmarket performance, with the S&P 500 down 5.3% over the past three months – compared to a 3.2% rise for the FTSE All-Share and 9.9% for the Eurostoxx 50. This could be perhaps dismissed as ‘noise’ were it not for the significant share of US household wealth held in the domestic stockmarket. Equity holdings made up 64% of US households’ financial assets in 2024 and rising share prices have helped support the ‘wealth effect’. This, in turn, has encouraged consumer spending and, should it reverse, could have a significant dampening effect.

To be fair, this situation is not entirely due to the disruption created by the Trump presidency as there were some weaknesses in the stockmarket anyway – for example, the astonishing earnings growth for the mega-cap technology companies was already slowing. “The growth gap between the US and the rest of the world is set to narrow, manufacturing is recovering, services are rolling over and corporate earnings growth is spreading beyond US big tech,” notes Paolini.

“It makes for a healthy market rotation – a broadening of investor demand that should keep the markets supported. The upshot is that we turn more positive on European equities and less so on US stocks, while also favouring US treasuries and cutting our exposure to European government bonds.”

For his part, Steven Bell, chief economist at Columbia Threadneedle, believes the financial markets’ response will prompt the Trump administration to row back on some of its more extreme measures. “The radical and disruptive agenda of the Trump presidency will be constrained by the reactions of the equity and bond markets from inflicting direct and serious damage to the US economy,” he argues.

‘Dynamic equilibrium’

“The stockmarket reaction to the imposition of tariffs on Mexico and Canada prompted a month’s delay to implementation. Since then, market reactions to new announcements have been more muted. This is a dynamic equilibrium, but political sensitivities over the stockmarket and economic sensitivities to Treasury yields – especially given the extent of the Federal debt – are likely to act as a constraint on policies that have a direct, negative impact on the economy.”

Equally, he says, declining US inflation – if it happens – should deliver real earnings growth for the US consumer. If wage inflation follows the downward trend of consumer inflation, the Federal Reserve has room to cut interest rate cuts. This week’s inflation data will be crucial in judging whether this is likely.

If a significant recession were to materialise, however, it could lead to a full-blown sell-off of risk assets across the world, rather than just a rotation out of the US – though this is not happening yet. “Overall, signs of vulnerability in the US economy are not enough to prompt us to turn bearish on equities and bullish on bonds, as previously weak areas of the global economy such as Europe and the manufacturing sector are showing signs of recovery,” concludes Paolini.

The problem with US markets is they have been priced for ‘US exceptionalism’ – and if US businesses are not exceptional, then they just look expensive. In Europe or China, investors appear to get access to a growth story – Germany’s fiscal spending, say, or China’s stimulus package – whereas, in the US, growth is priced into market expectations and yet may not materialise. As things stand, a crisis for the US seems improbable, with the administration likely to row back before any real economic damage is done – then again, but it does not need to be a crisis for US markets to look vulnerable.

Read more on this from the Economist here, from the Guardian here and from Trustnet here