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Rathbones Report

Dean Layzell, of Rathbones Investment Management International, explains why investors’ nerves have been tested so far this year

IN 2000, Ronan Keating released the single Life is a Rollercoaster, and when I was asked to write a summary of the financial markets, my mind instantly went to this song to describe the first six months of the year.

A colleague recently described markets in a slightly different way, as a “catalyst-rich environment”, and they weren’t exaggerating. From tariff shocks and wobbly US GDP numbers to wild swings in recession probabilities, courtroom drama in Washington and a very public spat between a billionaire and the US President on X, the first half of the year has tested investors’ nerves.

US recession watch

At the centre of the storm sits President Trump’s tariff-heavy agenda. His dramatic “Liberation Day” announcements in April sent equity and bond markets into a spin, with Polymarket recession odds soaring to 65%, up from just 18% at the start of the year. Now? A more modest 28% as I write, roughly in line with our own view. Markets appear to be concluding that also, for all the fire and fury, the President won’t drive the economy off a cliff.

That’s not to say the tariffs are going away. But if they settle somewhere in the low double digits, as seems likely, markets can probably live with that. We would all prefer a return to normality, but if this means a bit more stability, most investors will take it. Suboptimal certainty beats unpredictable chaos.

The Taco Trade

Donald Trump’s diet is famously poor. Tacos can be healthy – depending on the filling. But the Taco Trade isn’t culinary. It stands for “Trump Always Chickens Out”, a term coined by the FT’s Robert Armstrong. It captures the President’s habit of backing away from his most severe threats, especially on tariffs, when markets react negatively.

A recent ruling by the International Court of Trade – though paused on appeal – challenged the legality of Trump’s tariff spree. It reassured markets that institutional checks still matter. The UK dodged some tariff fallout through its Economic Prosperity Deal with the US. Not quite a complete trade agreement, but it helped shield British steel, even if our ethanol producers now face stiff competition from the United States.

Dollar dilemmas

One curious feature of recent volatility is the dollar weakening, even as US bond yields rise. The geopolitical tone has shifted. Investors are wondering whether the dollar will continue to be the world’s reserve currency. No apparent heir exists – China’s yuan lacks transparency, and the euro lacks unity – but a quiet asset rotation toward Europe and gold is under way.

Looking ahead

The road ahead may still have a few bumps, but it also offers opportunity. AI continues to supercharge corporate earnings, particularly in the tech sector. As one fund manager put it, today’s AI is like dial-up internet; it’s only going to get better.

For our part, we continue to manage well-diversified, global portfolios that aim to capture long-term economic shifts while smoothing the ride in the short term. Through careful allocation across bonds, equities and alternatives, we strive to reduce volatility without missing out on the innovation and momentum that are shaping the future.

In this environment, it’s not about avoiding the rollercoaster. It’s about having the correct harness to keep you safe and secure so you can navigate the ride.