Sentiment has been badly affected as seen from US indicators like consumer confidence and inflation expectation, although actual economic data has not been as bad, he adds.
However, the impact of the tariffs will probably become more evident in the coming months and the US economy may slow down and inflation may be sticky or even rise, says Menon.
That said, these may not be enough to cause a bear market or a prolonged one, “even if stock markets fall past the 20% mark”, he adds, given if the impact on US growth and inflation is “not severe and catastrophic”.
“We do not see a US recession at this juncture. We see the economy slowing down from 2.8% in 2024 to 2.2% this year, but a downturn is not our base case scenario,” says Menon.
See also: Trade policy turmoil raises recession risk, but long-term equity outlook holds up: Capital Group
Instead, investors should pay more attention to tax cuts in the second half of the year, he adds.
“Some comfort can be found from the fact that the White House is fully aware that an aggressive tariff agenda that hurts US growth badly, could also hurt the Republican Party’s chances in the midterm elections,” writes Menon.
Comfort can also be found in the US$7 trillion mountain of US money market funds sitting idle on the sidelines, which could offer market support, he adds.
See also: EM credit resilient and ready: Muzinich & Co
“Global equities as measured by the MSCI World Index is down by nearly 7% from its peak while the S&P 500 index is down just under 9%. Corrections of this order are normal even in bull markets, so investors should not overreact,” says Menon.
He adds: “The best strategy at this juncture is not to panic, but instead to focus on the medium term and manage risk by keeping a diversified portfolio and time-diversifying fresh investments via dollar cost averaging.”
