Life is stranger than fiction. All markets opened sharply lower only to stage a massive rebound erasing almost a 5% decline and posting a 3% gain on the erroneous headlines that the President had suspended all tariffs for 90 days. The news was carried on all major news outlets and within seven minutes, the S & P 500 added over $2.5 trillion in value according to Bloomberg.
And then, just as quickly, the gains evaporated. All told the round trip lasted about 15 minutes.
Equites did not trade back to the early morning lows, but after a volatile day ending mixed.
And then there is the bond market. The volatility is/was beyond insane. At the time of this writing, the yield curve is steepening dramatically. Maturities two years or less where whipsawed as the market is now discounting 125 bps of easing by year’s end. Longer dated Treasuries were crushed, sending yields up dramatically.
Treasuries trade on current and expected inflationary expectations. Inflation is still robust and is expected to accelerate because of the tariffs. However, if the tariffs are implemented, the odds of a recession rise considerably, thus the possibility of a more accommodative Federal Reserve.
BUT if you lower rates in an inflationary environment, will that not unanchor inflationary expectations, sending longer dated Treasuries higher in yield?
And then there is the massive amount of Treasuries that must be rolled over this year—about $9 trillion on top of the huge demand for funds from an insatiable Federal government where attempting to increase efficiency is regarded as bad policy.
Several Wall Street titans, who were at one time supporting the President are now slamming Trump’s plans to launch expansive tariffs
In a dual variable environment, higher tariffs mean higher prices for the consumer if businesses can pass the cost over to the consumer or lower margins if the consumer balks at paying higher prices forcing businesses to absorb the additional costs.
With or without the new tariffs, based upon several metrics, the S & P 500 is priced higher than any time since the dotcom bubble according to Bloomberg. The biggest metric is the massive amount of funds that are in one sector and seven/ten stocks that are massively overvalued and priced beyond perfection
The US is the global consumer. Ninety years of trade policy have dramatically changed and the odds of returning to yesterday is equivalent to putting toothpaste back into the tube.
It has been argued that the tariffs will hurt our trading partners more than it will hurt the US. Dow Jones writes in 2024 Viet Nam exported about $137 billion in goods to the US while only importing $13 billion on goods to the US, resulting in a $124 billion deficit.
Viet Nam’s total GDP is about $476 billion so trade with the US is critical.
A very dated statistic states that 45% of China’s production was/is geared for exports to the US, Western Europe, and Japan.
US trade with China is already down about 25% before the tariffs were implemented, a major reason as to why the Chinese economy is regarded as “sluggish.”
Will the tariffs hurt China more than the US, perhaps a reason as to why the President increased the potential tariffs on China by an additional 50% in response to China’s actions?
Perhaps the only concrete statement to make is the outlook is unquantifiable. No one knows what will happen and those who make definitive statements are espousing nothing other than rhetoric and conjecture to support one’s preconceived views.
What will happen today?
Last night the foreign markets were up. London was up 1.87%, Paris up 1.52% and Frankfurt up 1.49%.. China was up 1.58%, Japan up 6.03% and Hang Seng up 1.51%.
Dow and NASDAQ futures are up 1.75% and 1.25%, respectively as the Administration is “signaling its openness to trade deals.”
At one time yesterday, the 40 month return on the S & P 500 was flat as the index retreated almost all the way back to where it stood in January 2022, approximately the 4,800 area. The carnage has been great as the average stock is down 26% according to Blomberg with some of the Magnificent Seven down over 40% as over 50% of their earnings are generated from overseas.
The 10-year is off 1/32 to yield 4.19%.
