Extreme volatility in financial markets is predicted to last for many weeks yet as the flow of news about international trade worsens before things get better, UBS has predicted.
"Markets are likely to stay volatile in the weeks ahead," said UBS chief investment officer Mark Haefele, "as investor focus shifts between changing interpretations of the Trump administration’s goals."
The Swiss bank has a base-case forecast that the initial phase following the imposition of Donald Trump's 'reciprocal' tariffs, which started overnight, will see tariffs "rise further", before in the second half of the year US effective tariff rates should start to come down "as legal, business and political pressure mounts" and deals with individual countries and industries are struck.
UBS also expects the US Federal Reserve to cut interest rates several times to support the economy.
"However, investors should prepare for additional near-term downside," the CIO warned in his daily note.
"We do not believe the S&P 500 is currently priced for much beyond a mild recession," Haefele cautioned, adding that while the US benchmark is at around 5,000 much lower levels of around 3,500-4,500 "would be more consistent with historical recessions in our view".
He added: "And while an about-face from the Trump administration or court injunctions can’t be ruled out, in the near term we think it is more likely that news flow continues to worsen, including potential EU retaliation and an end to exemptions on pharmaceuticals and semiconductors."
UBS recommended that investors try to manage volatility, take advantage of it or "look through" it.
Managing volatility includes looking to hedge portfolios against potential further downside with investments such as gold, quality bonds and other means.
Taking advantage of volatility for UBS includes currency trading, with a more sustained period of weakness for the US dollar seen as likely over the medium term, "particularly if the Fed cuts interest rates more quickly than expected in response to weakness in US economic growth".
To look through volatility, for investors who were 'under-invested' going into the sell-off and/or are willing to take on near-term risk for potential
long-term reward, which could include equities.
Haefele and his team noted that "periods of market stress have historically and consistently offered long-term rewards for diversified investors who look through near-term volatility and stay the course and/or put fresh money to work".