29/04/2025
Why Didn’t You Sell Before Liberation Day?
This was a question posed to me by an anxious client as markets tumbled in the days after President Trump’s April 2 declaration of tariffs on imports into the USA. After all, the White House had clearly flagged the announcement. Surely an astute investor would have sold a chunk of equities on April 1 st and stood on the sidelines during the ensuing stock market rout, only to swoop back in and reinvest at a significantly lower level.
If only it were so simple.
In this short article, I try to explain why things aren’t always as easy as they seem with the benefit of hindsight, that a large part of the sell-off occurred by mid-March, over two weeks before April 2 and that hedge funds – widely considered the smartest investors there are – get it wrong so often that even they only manage to deliver average returns.
Which is why the old adage that ‘it’s time in the markets that counts, rather than timing the markets’ remains the correct approach for serious investors.
Why our approach is to stay invested:
The starting point of my analysis is the simple fact that what transpired on April 2 was not what was anticipated. When President Trump announced that tariffs would be introduced, the consensus expectation was for an across-the-board tariff of about 10%. What he delivered was far more significant than that.
Equity markets are considered to be governed by the efficient market hypothesis. This suggests that the prices of financial instruments reflect all available market information. Hence, investors cannot have an edge over each other by adopting different market timing strategies.
In advance of ‘Liberation Day’, markets therefore started to price in the impact of what was anticipated. Goldman Sachs strategist David Kostin in February predicted a 5% decline in the S&P 500 if Trump's proposed tariffs were implemented and sustained. In fact, in the period between his prediction and mid-March, the benchmark S&P 500 declined by 7%. So, markets had already ‘priced in’ what was expected and then settled down and were fairly stable after that.
This was despite the fact that since the president’s inauguration in January, we have seen several attempts already to impose swingeing tariffs (on Canada and Mexico) which were rapidly reversed. So there was also scepticism about not only what would be announced, but also what any final deal might be.
Few anticipated what was to follow.
Some investors actually saw the beginning of April as a chance to buy. Fundstrat’s Tom Lee suggested said on CNBC Monday 31 March that markets could have the “right pieces” for a bottom this week. The cofounder of Fundstrat has earned a reputation for his recent, correct stock-market forecasts and his call for a bottom was a bullish signal that the worst of the selloff may have been over before April 2, clearing the way for a rebound.
This shows how difficult it is to ‘time the markets’ and why ‘time in the market’ has consistently proven to be the most successful approach. Harry Markowitz’s Nobel Prize-winning Modern Portfolio Theory work definitely proved that asset allocation (which is our key focus) is by far the largest contributor to performance and ‘market timing’ provides little success as it’s impossible to execute repeatedly and successfully.
This is clearly illustrated by the underwhelming returns delivered by hedge funds – supposedly ‘the smartest guys in the room’ for each of the last ten years. As you can see from the attached chart, for nine out of the last ten years, hedge fund returns have been at or below average.
I have never heard of any investor who has repeatedly ‘sold at the top’ and ‘bought back in at the bottom’. I’m sure that this is also true in April 2025 - anyone who sold in advance of April 2 would then have almost certainly missed the near 10% market bounce when Trump delayed the tariff changes a few days later. In fact, at the time of writing this analysis, the benchmark S&P 500 index is a mere 2.5% below where it was before the Liberation Day announcement.
Staying invested has consistently proven to be the best approach as the cost of being out of the market on the best few days is dramatic. This reality and the importance of not allowing short term emotional triggers to undermine a proven long-term approach is what guides our thinking and it should what guides yours as well.
The key thing about Liberation Day on April 2nd was that there was a huge surprise. If there is one thing that markets hate, it is uncertainty. This is what caused the rapid sell-off, which was halted by the dramatic events in the bond markets which forced Trump to retreat in the same way that Liz Truss was forced to abandon her reckless budget in September 2022 by the bond markets.
So, the markets adjusted to the expectation of 10% tariffs in a timely and calm way in advance of April 2, then some hugely unexpected and highly negative surprises triggered a lot of short-term volatility.
Statistical analysis shows that the stock market drops at least 10% nearly once a year on average—and sometimes more. However, historically, the steeper the drop, the stronger the rebound. This is also why staying invested, rather than the proven-to-be-impossible task of timing the markets is the right approach. As April draws to a close and the attention of the
media moves on elsewhere, the fact that stock markets are ending April pretty much where they started proves the correctness of this approach once more.
The value of investments, and any income generated from them, can fall as well as rise. Past performance is not a reliable indicator of future results.
