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Investors have long been preparing for uncertainty in the age of Trump 2.0, but even the most savvy saver may not have been prepared for the stock market chaos that’s ensued.
Between President Donald Trump’s inauguration on the 20th January 2025 and the 6th March, the S&P 500 has tumbled 5.14%, hampered by the severe unpredictability of tariffs, the prospect of international trade wars, and the struggle to quantify the impact of the Trump administration’s policies.
While markets have begun to recede due to a number of different pressures, including the emergence of an external generative AI competitor in the form of DeepSeek, it’s Trump’s continued use of tariffs as a political bargaining chip that’s set markets into a spin in recent weeks.
With the CBOE VIX index, a measure of market volatility, climbing to 25 in a sustained rise since mid-February, there’s little indication that US stocks and shares are set to calm down in the short term at least. But what does this mean for UK investors and ISA holders?
Market and Inflation Challenges
According to veteran hedge fund manager Doug Kass’ trading diary, weakness in the Magnificent Seven tech companies, which were 10% lower year-to-date and double the decline of the Nasdaq Index, will continue to push the S&P 500 lower.
The market downturn, Kass notes, will move in a ‘sawtooth pattern’ lower, with short-term relief rallies leading to lower highs.
Concerningly, Kass suggests that the market is on a path for a 10-15% decline in 2025, citing ‘slugflation’ (sticky inflation and low GDP growth), interest rate cut pauses by the Federal Reserve, a misalignment in stock valuations, and the tariffs.
Although Trump has continually delayed imposing the majority of his tariffs on Canada and Mexico, the prospect of a trade war could be a major contributor to inflation.
The President acknowledged the impact of his tariffs by claiming that there will be “a little disturbance, but we’re OK with that.”
UK Chancellor Rachel Reeves appeared more downbeat about Trump’s tariffs, suggesting that even if none are imposed on the country, they would still slow global trade domestically with slower GDP growth and higher inflation rates.
The Impact on UK Investors
Let’s take a look at what the impact of US market volatility and the prospect of tariffs mean for UK investors.
Firstly, for stocks and shares ISA investors, an S&P 500 downturn is likely to be highly troublesome when it comes to wealth management. The significant capitalisation of US markets means that global stocks and shares can be influenced by sharp price movements. If growth turns negative, it’s going to be far more difficult for individual savings account managers to generate momentum for subscribers.
Inflation can also be damaging to both cash ISA and stocks and shares ISA holders. This is because our ISA earnings are devalued in real-terms as the cost of living increases. At present, it’s straightforward to quantify inflation-adjusted earnings because cash ISA rates must be an AER that’s higher than the rate of inflation. If you find that your rates are causing a devaluation of your savings, you should consider transferring to a new provider or looking at a more defensive investment strategy.
However, variable rate cash ISA holders may ultimately benefit from the higher interest rates that inflation can lead to.
Because inflation can stifle economic growth, central banks are generally proactive in using interest rate hikes to cool spending and keep inflation under control. This is likely to lead to higher AER returns for cash ISAs which can help you to continue saving beyond the rate of inflation.
What Can I Do to Protect my Investments?
If you’re beginning to see market volatility in the United States harm your investments, don’t panic. There are plenty of options to protect your wealth in a downturn.
For investors in stocks and shares, it’s important to remember that Wall Street’s historical performance is exceptionally strong, and that your long-term financial goals are unlikely to be impacted by volatility. However, if you have more short-term ambitions for your portfolio, it could be worth looking to more resilient stocks that perform well during periods of high inflation.
These market options can include discount store stocks, healthcare companies, dividend stocks with a strong history of payouts, or utilities firms.
For savings accounts, be sure to regularly audit your returns against inflation, and be prepared to make adjustments if we see rates increase. If the Bank of England reverses its interest rate cuts to combat inflation, it’s worth looking to a variable ISA, or switching your fixed rate individual savings account to a higher AER.
Volatility Doesn’t Impact Long-Term Goals
Above all, it’s worth remembering that short-term market volatility doesn’t impact your long-term financial goals. With this in mind, don’t let your fears over a market decline undo your hard work in building your investment portfolio.
Donald Trump’s second-term may have brought more widespread volatility to Wall Street, but maintaining a focus on your investment strategy while ignoring the noise can be a great way of keeping a clear head in your decision-making. It’s difficult to know what tomorrow will bring, but keeping calm and level-headed is the best way to manage your wealth.
