The global economy and financial markets are about to enter a new world; different from what we have been used to over the past 50 years. It is becoming clear that the new US administration is dead serious about reversing what it sees as US weaknesses: persistent trade deficits, out-of-control government spending, and a sprawling mess of expensive military commitments around the world. The administration has been unified and consistent in its message: things are not going back to the way they were. This message met with widespread disbelief by the markets. DOGE sounded like a joke and the tariff talk was, surely, just empty posturing. As we are all discovering now, this is no joke.
Before April, the global economy looked to be in decent, if not great, shape. The US economy was growing, helped by Fed rate cuts in late 2024 as well as continuing effects of fiscal stimulus inherited from the Biden administration. The Chinese economy started to recover from after-effects of a real estate crisis as the Chinese government unveiled plans to massively recapitalize banks and subsidize consumer spending. Chinese equities soared by 30% in the first quarter 2025, followed by prices of commodities linked to Chinese demand: copper went up by 25%, iron ore by 10%, gold by 20%.
The unveiling of the US tariff plans on April 2nd was a jolt. It wasn’t just the scope and severity of the new tariffs that shocked; it was the vision behind them. The tariffs are intended to reverse decades of globalization, revive US manufacturing, reduce US budget deficits, and prevent China from becoming the world hegemon. This is not a short-term indulgence of an attention-starved lunatic. This is a new direction for US economic policy.
Whether it succeeds or fails, it will rearrange the geopolitical chessboard. The full implications will not be clear for months, if not years. The immediate effects included a stock market sell-off (much more severe in China than in the US), collapse in the price of economically sensitive commodities (oil, copper, gold, natural gas), and a fall in US Treasury bond prices (rising yields). The long-term effects could include a slowdown of global economic growth, persistent inflation, higher interest rates, and outperformance of US manufacturing equities over technology, service, and consumer stocks. There are probably many more implications that are not obvious now.
As trend followers, we thrive on change, but we perform badly at turning points. When directions change abruptly, our models take some time before they ascertain that the market moves are more than just noise. Once a new trend becomes established, however, we fully embrace it and ride it all the way to its exhaustion.
Recent years provided textbook examples of this distinction. The Covid sell-off in March and April 2020 was brief and it reversed quickly after massive government stimulus and interventions. Trend followers suffered from whiplash, delivering poor returns. On the other hand, the equity and bond bear market of 2022 generated good profits for trend followers, who persisted in their long US Dollar and short global bond positions for months as the markets took time to appreciate how committed the Fed was to cutting inflation.
We are at a turning point now. In the short term, our performance suffers because multiple trends are reversing across the board, in commodities, equities, bonds and currencies. The turn has been sharp and painful. We are reducing our exposures across the board in light of new data coming in.
In the long term, we are ready to deploy capital in new trends as they emerge. The beauty of trend following is that we do not need to forecast the future. The new policies of US administration may have massive impact—or they may be reversed quickly. Either way, as evidence arrives, we will take positions that reflect new information. We have a systematic plan that we will execute, unemotionally, no matter what our feelings may be. Market prices will guide us.
Our peers who run discretionary strategies, especially in stocks and bonds, have a more difficult problem. They need to position themselves based on their predictions of how everything will play out. They must do so while handling emotional stress and psychological pressures in the middle of market turmoil. Their predicament is not enviable.
Our crystal ball is not particularly clearer than anyone else’s. What we do feel, however, is that the next few years are going to be difficult to navigate with the old playbook (sell the rip, sit out the chop, front run the Fed, buy the dip). The Fed is not coming to the rescue this time. The future will not be like the past. The days of inflating our way out of every 20% stock market sell-off are over. Holding equities will no longer be an asymmetrical, one-way bet, and that is also true for asset classes that pretend not to be equities, like private equity, real estate, high-yield bonds, and private credit.
At times like these, we feel great relief to be trend followers. We are prepared for whatever may come.