How on earth do we manage our money through the head-spinning events we are now witnessing?
Anyone who checked their pension fund on Tuesday would have been depressed to see a big fall so far this year.
By Thursday – following Donald Trump’s dramatic decision to delay the implementation of many of the tariffs – markets were roaring ahead again and funds were looking a bit healthier, though were still generally down for the year to date.
On Wednesday markets were anticipating four more European Central Bank (ECB) interest rate cuts this year – but this could change too, if a negotiated pathway to avoid the worst of the tariffs appears.
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Even those who decided to put their money into the generally sleepy world of government bonds are seeing uncertainty and upheaval. So how do we try to navigate through the maze? Here are the key questions – as they appear today.
1. Is the worst over for markets?
Equity markets have surged ahead after Trump’s reversal of course. The reason for this is pretty clear. Investors now hope there might be a negotiated way out of the mess and that a big global trade war could be avoided.
However, in the words of Taoiseach Micheál Martin: “We are not out of the woods yet.” There are still a general 10 per cent tariff on most imports into the United States bar those from China, where a full-scale trade war is now under way between the world’s two biggest economies.
[ China says it is open to talks with US over tariffsOpens in new window ]
The tariffs on steel and aluminium remain, as do those on cars. And special tariffs on copper, lumber and – crucially for Ireland – pharma all appear to be under consideration. And we simply have no clue how the negotiations will work out between the US and other countries, including the EU.
In short, a lot of uncertainty still lies ahead and significant volatility is likely in financial markets. The risk of further significant falls in equities remains if things go wrong.
The S&P 500 soared 10 per cent yesterday, to stand just 7 per cent below its position at the start of the year. However, a weak opening in US markets on Thursday just underlines the uncertainty ahead and by lunchtime in the US stocks were noticeable weak across the board. Analysts reckon that even the tariffs already in place will have a significant impact on US inflation and household spending power and increase the risk of recession. And investor worry about the implications of a trade war with China. This story still has a long way to run.
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The coming down to earth of the market is “not necessarily a bad thing” according to Joe Gill, stockbroker and adjunct professor at the Cork University Business School.
He pointed out that US markets had soared in recent years, driven in large part by the so-called “magnificent seven” tech stocks – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla.
Gill added that the S&P index was still up by close to 90 per cent over the past five years and that investors may find good long-term value at some stage soon in the market after the recent significant falls.
For now, however, trading looks set to remain choppy despite the initial market jump. In a comment on Thursday, Davy stockbrokers warned that “persistently negative tariff newsflow looks set to continue for the foreseeable future. Further escalation of tariffs on China will continue to weigh on investor sentiment.”
In other words, keep your seat belts buckled for now.
2. What about my pension?
When markets take a hit, so does the value of pension funds. And this year has seen a poor start for funds, with most managed funds – those with a mix of equity, bond and other investments – down by 5 to 8 per cent.
In the maelstrom of earlier this week, some pension holders were looking at the fall in the value of their funds and sources say some were – as often happens when turmoil hits – even considering moving more of their investments into cash.
Munro O’Dwyer, partner in PwC Ireland specialising in pensions, says that while defined-contribution pension holders – whose pension pot depends on market performance – are understandably unsettled and finding it hard to keep a perspective, that historically taking investment money “off the table” has provided to be costly. There is generally no point, in other words, switching into cash after markets fall.
Most pension holders have done well over the last five to 10 years as markets have made gains over the long term, he points out.
An average managed fund has risen by about 50 per cent over the past five years, though there is a wider dispersal around this average from one fund to another. Experience suggests that in time markets will again rally, according to O’Dwyer. As Gill puts it, looking at a long-term graph, upheavals almost look like ripples in an upward curve.
In the short term, however, significant uncertainty and volatility lies ahead. The losses in bonds markets on late Tuesday and Wednesday were worrying, too, for investors, as gains in this part of a pension fund will often offset losses in equities to some extent at least. Markets in general settled on Thursday.
Interest rates have been on a firm downwards trend since late 2023 and this is expected to continue. The question is how fast
As O’Dwyer points out, those in early or mid-career can hope that over time the riskier equity investments will deliver, while those closer to retirement should already have seen most of their funds move into less volatile assets such as cash and fixed-income investments such as bonds.
This is to ensure their retirement pot is not upended by a market collapse. Also, for many, “retirement is not the end game for a pension fund”. Traditionally people with defined-contribution pensions bought annuities in retirement, which meant the value of their fund at retirement was vital.
Some still do take this route – but many move their money into approved retirement funds and thus do not have to draw them down on retirement date and, depending on their finances, may have significant flexibility in when to do so.
3. And the interest rate on my loan – or savings?
Interest rates have been on a firm downwards trend since late 2023 and this is expected to continue. The question is how quickly.
Another ECB cut is expected next Thursday, probably of a quarter of a point. And another may well follow in June. From the ECB’s perspective, inflation is coming down towards the 2 per cent target while EU growth remains weak, despite plans by governments to spend a bit more on investment and defence.
Before Trump’s reversal, analysts had felt that a further hit to EU growth would accelerate the pace of interest rate cuts, perhaps with four more this year in total, including next week’s, reducing the ECB deposit rate from 2.5 per cent now towards 1.5 per cent.
For savers, the dilemma of where to get any return on their money, which had eased a bit after interest rates rose in the inflationary surge, is coming back
Wednesday night’s announcement lessened the threat of a transatlantic trade war, but by no means takes it off the table.
The ECB is likely to cut next week for sure and probably in June, but what happens over the balance of the year remains in question. This should keep borrowing and savings rates edging lower – with tracker rates of course directly matching ECB cuts.
Interest rates are most unlikely to return to the historic lows seen for much of the decade leading up to Covid-19, but the outlook for mortgage holders and particularly those on trackers or looking to refinance fixed-rate loans that are maturing continues to improve slowly.
As different institutions continue to respond differently to this trend, shopping around remains vital. For savers, the dilemma of where to get any return on their money, which had eased a bit after interest rates rose in the inflationary surge, is coming back.
