To avoid an accident in the markets, put your seatbelts on!

– US President Trump turned the markets upside down in February. US equities slid. One could say this was on the back of FED’s decision on January 29^th to hold rates steady. FED’s purpose was to “wait and see” Trump administration’s trade decisions and see how inflation would fare. That means interest rates will likely remain higher for longer than anticipated which could have weighed on the US markets.

– Trump declared a 25% tariff effective immediately on its two closest trade neighbours, Canada and Mexico. Both countries managed to defer the decision by 30 days, but markets know this is just a delay as opposed to a change in policy. Trump is adamant that there will be more of these decisions, meaning while “making America great again” Trump is on a path of “making America much more expensive again.” Alienating its closest trade partners also shows Trump’s anti-globalization attitude which will likely make America a very lonely country during his tenure.

– US equities weakened fuelled by fears that Trump’s global trade war could buoy inflation despite FED’s decision to hold the rates steady. As of February 21^st, the US equity indices S&P 500 and NASDAQ were both down by -0.5% on the month while the Canadian equity index S&P/TSX was down by -1.7% Unaffected by the tumbling US markets, the European stock index Euro Stoxx 50 delivered +3.5% over the same period. Global emerging markets equity index MSCI EM did even better by delivering +5.1% over the same period.

– Given the mixed returns globally, the global equity markets indicator MSCI All Country World Index (ACWI) was up by only +0.8% over the same period bringing its year to date return to +3.9%. Since end of April 2024, long term bond prices have been on the rise (meaning yields have been dropping) with the exception of October and December when bond prices dropped (meaning their yields increased). The long-term bonds yields continued their decline in February predominantly driven by a drop in real rates.

– Ambiguity surrounding inflation had Bitcoin retreat from its January peak of $106,000 back to the $96,000 range towards end of February. As of February 21^st Bitcoin was down by -6.6% on the month, while Ethereum retreated by -20.4% over the same period. Gold had another strong month due to the uncertainty surrounding Trump’s potentially inflationary policies delivering +4.2%. Crude oil had a weak month in February as markets were concerned that global demand could ease. As of February 21^st, the first month futures contract for US crude oil WTI was down by -2.9%.

– The positive outlook in global equities didn’t help the Turkish stock market. As of February 21^st, Borsa Istanbul Index BIST100 was down by -4% in local currency terms (-5.8% in US dollar basis) over the month. The performance of BIST100 in US dollar terms underperforming its return in local currency is due to the appreciation in the greenback against Turkish Lira by +1.9% since end of January.

– During volatile periods like these, investors should consider adding to their portfolios investments that provide downside protection. What are those investments? Gold is one of them. Investors could consider reducing some risk in their portfolios by moving some of their equity type assets to cash and cash like instruments such as gold while allowing the markets to cool off. The price of gold which has been on a continuous climb triggered predominantly by these risks should be considered an important gauge by investors.

– Under the circumstances, we believe investors would benefit from a more defensive investment portfolio as opposed to an aggressive one. We think investors need to embrace for impact. Considering Trump’s unpredictable nature and aggressive determination to win at all costs and the recent market reaction in response, we think February may just be the beginning to what may turn out to be a painful year for investors and non-investors alike.

In the land of financial markets, it is not just macroeconomic data that moves the asset prices, but also major news. However, it is quite challenging to know what financial markets would have done if a major news didn’t hit them. That is because there are so many factors at play that impact the markets at any point in time that one can’t gauge how other factors would have influenced prices in the absence of one single major event. Would one of those “other” factors then act as the “major event” and perhaps still move the markets in the same direction? What if the “major news” wasn’t really considered “major” by the markets? It is nearly impossible to answer these questions given the massive number of markets and market players and the complex web of interaction amongst various markets.

Yet, once in a while we do get a glimpse of “what could have been” or “should have been” when a big news or event hits only one part of a market, leaving the rest undisturbed. In February, we had exactly that in equities. US equities seemed to respond to what could only be described as the “Trump effect” triggered by Trump’s hostile and aggressive tariff and trade decisions against its closest trade partners and his unorthodox solutions and comments regarding ongoing conflicts in Middle East and between Russia and Ukraine. We know this because not only this was the first month in a while all US equities had weak performance, but also global equities fared well in general.

TRUMP TURNED MARKETS UPSIDE DOWN IN FEBRUARY

One could say this was on the back of FED’s decision on January 29^th to hold rates steady. FED’s purpose was to “wait and see” Trump administration’s trade decisions and see how inflation would fare. That means interest rates will likely remain higher for longer than anticipated which could have weighed on the US markets. However, markets had already been anticipating the FED to hold off on rate cuts. Indeed, there was only one more rate cut expected in the near term, all of which had already been priced into the markets. In other words there wasn’t a whole lot of unexpected information on this front.

What was unexpected was Trump declaring a 25% tariff effective immediately on its two closest trade neighbours, Canada and Mexico. Both countries managed to defer the decision by 30 days, but markets know this is just a delay as opposed to a change in policy. Trump is adamant that there will be more of these decisions, meaning while “making America great again” Trump is on a path of “making America much more expensive again.” Alienating its closest trade partners also shows Trump’s anti-globalization attitude which will likely make America a very lonely country during his tenure.

Not just the US equity markets, but also commodities, bonds and even currencies all got the message and responded accordingly in February. Let’s look at the market reaction throughout the month.

US EQUITIES RETREATED IN FEBRUARY

US equities weakened fuelled by fears that Trump’s global trade war could buoy inflation despite FED’s decision to hold the rates steady. As of February 21^st, the US equity indices S&P 500 and NASDAQ were both down by -0.5% on the month while the Canadian equity index S&P/TSX was down by -1.7% due to ambiguity regarding its economy which is very dependent on its trade relations with US. Unaffected by the tumbling US markets, the European stock index Euro Stoxx 50 delivered +3.5% over the same period. Global emerging markets equity index MSCI EM did even better by delivering +5.1% over the same period. Given the mixed returns globally, the global equity markets indicator MSCI All Country World Index (ACWI) was up by only +0.8% over the same period bringing its year to date return to +3.9%.

LONG TERM BOND YIELDS CONTINUED TO EASE

Since end of April 2024, long term bond prices have been on the rise (meaning yields have been dropping) with the exception of October and December when bond prices dropped (meaning their yields increased). The long-term bonds yields continued their decline in February predominantly driven by a drop in real rates. As a quick reminder, while shorter durations are driven by the central bank interest rate decisions, longer term maturities rely more on expected inflation and real rates (in a simplified form nominal rate = expected inflation + real rate).

The graph below illustrates how bond yields changed over the last year, particularly how they have been easing since April 2024 (red line in the graph below).

Source: Bloomberg

In line with this slight drop in long-term bond yields, as of February 21^st, Bloomberg Global Aggregate Bond Index, the Global Corporate Bond Index and the High Yield Bond Index all had positive monthly performance respectively delivering +0.4%, +0.75% and +0.4%.

BITCOIN RETREATED VISIBLY

Despite Trump’s pro-crypto stance and the easing global liquidity conditions, ambiguity surrounding inflation had Bitcoin retreat from its January peak of $106,000 back to the $96,000 range towards end of February. As of February 21^st Bitcoin was down by -6.6% on the month, while Ethereum retreated by -20.4% over the same period.

GOLD HAD A GREAT FEBRUARY

Gold had another strong month due to the uncertainty surrounding Trump’s potentially inflationary policies. As of February 21st, the first month futures contract for gold was up by +4.2% on the month building further on its strong performance in 2024 and January 2025.

CRUDE OIL DROPPED IN FEBRUARY

Crude oil had a weak month in February as markets were concerned that global demand could ease due to the negative impact of Trump’s new trade policies on global trade and commodity prices. As a result, as of February 21^st, the first month futures contract for US crude oil WTI was down by -2.9%.

TURKISH STOCKS DIDN’T FARE WELL

The positive outlook in global equities didn’t help the Turkish stock market. As of February 21^st, Borsa Istanbul Index BIST100 was down by -4% in local currency terms (-5.8% in US dollar basis) over the month. The performance of BIST100 in US dollar terms underperforming its return in local currency is due to the appreciation in the greenback against Turkish Lira by +1.9% since end of January.

MARKET VOLATILITY IS LIKELY TO STAY

We have been warning our readers about the potential fallout the markets may experience as a result of the new US president Trump’s war on “global threat” to its economy from its trade partners which may prove to be inflationary. Case in point, not only the FED paused its rate cuts, in January they noted that a rate cut was unlikely in March. This is quite unusual for the FED which is predominantly driven by data. However, we are not in the realm of data anymore. This is a period of ambiguity in both macroeconomics as well as international politics and relations. It is hard to guess what Trump’s next move may be. So far, he has proven his desire to win at all costs. Whether that may cause a potential friction with a neighbour or another country remains to be seen.

THE QUESTION INVESTORS SHOULD ASK THEMSELVES

The question that investors should be asking themselves at this point is what may happen to their portfolios should such a negative scenario unfold. We think being cautious and vigilant are extremely important at a time like this. Once again, we would like to reiterate the benefit of investments that provide downside protection during volatile periods like these, which investors should consider adding to their portfolios. What are those investments? Gold is one of them. Investors could consider reducing some risk in their portfolios by moving some of their equity type assets to cash and cash like instruments such as gold while allowing the markets to cool off. The price of gold which has been on a continuous climb triggered predominantly by these risks should be considered an important gauge by investors. Also, as noted before, this environment would allow for credit investments, such as corporate and high yield bonds, which are priced off government bonds, to appreciate particularly for longer maturity instruments. This has already been the case so far and we expect it to continue.

THIS MAY BE A PAINFUL YEAR FOR INVESTORS

Under the circumstances, we believe investors would benefit from a more defensive investment portfolio as opposed to an aggressive one. We think investors need to embrace for impact. Considering Trump’s unpredictable nature and aggressive determination to win at all costs and the recent market reaction in response, we think February may just be the beginning to what may turn out to be a painful year for investors and non-investors alike.

Ela Karahasanoglu, MBA, CFA, CAIA

International Investments Director

karahasanoglu@turcomoney.com

ela.karahasanoglu@ekrportfolioadvisory.com

https://www.linkedin.com/in/elakarahasanoglu/