The Big Picture
Column Summary:
*Tariff actions shocked markets, creating deep uncertainty about economic outcomes.
*The year-to-date performance of the major indices and key market sectors reflects the market's growth concerns.
*Economic data in coming months will reveal the true cost and impact of the tariffs and lend certainty to a highly uncertain situation.
The Trump administration's tariff actions caused a shock to the market's system, not so much in how the market functions but in how it thinks. Specifically, it left the market questioning, well, just about everything.
What will happen to our geopolitical alliances? What will happen to the economy? What will happen to inflation? What will the Fed do? What will happen to earnings?
We will find out the answers in due time, but waiting may just be the hardest thing for this market to do.
Bear Market Avoided
The S&P 500 had an all-time closing high of 6,144.15 on February 19. Less than two months later, it was trading below 5,000 and threatening to enter a bear market, which is generally defined as a 20%+ drop on a closing basis from a prior closing high.
The S&P 500 avoided that technical fate with a close of 4,982.77 (-18.9%) on April 8. It had declined as much as 21.3% at its intraday low of 4,835.04 on April 7, but it bounced back and closed that session at 5,062.25.
There has been some chatter that the S&P 500 is apt to retest that low at some point and that market participants will be looking for confirmation on whether that is the low based on how it responds to the retest. Again, time will tell if we get there, but we would argue that, if we do, it will be the economic data that takes us there and not tariff news.
What Is the Cost?
The shock to the market was precipitated by the announcement of some onerous reciprocal tariff rates for most countries and the implementation of a draconian 145% tariff rate on goods imported from China. The latter prompted China to implement a 125% tariff rate on goods imported from the U.S. and to declare that it will ignore any further tariff actions by the U.S.
There is certainly a lot to unpack in any negotiations that might come to fruition with China, but negotiations have started with other countries with an eye on getting better trade terms for the U.S. than existed before. There is some positivity in that thought, but a global baseline tariff rate of 10%, and anything above that, will not be without its costs.
The question is, just how costly will it be? The answer will be in the economic data that arrives in the coming months.
We know there has been a frontrunning of tariffs with the pickup in imports, which will be a drag on Q1 GDP, yet there could be payback lurking on both sides of the trade ledger in coming months, with declines in imports and exports, as the impact of the tariffs takes root in supply chains, freight costs, and the psyche of consumers around the globe dealing with related price adjustments.
The market has reserved some optimism for trade deals getting struck, but it hasn't excused the thought that the messiness of the U.S. restructuring global trade could result in an economic dislocation that manifests itself in a range of economic outcomes that include stagflation, recession, or below-potential growth.
To be sure, there isn't a prevailing view in the market that the economy, in the near term, is going to flourish as a result of the tariff actions. The administration is confident that will be the case over the long run, yet it is plain to see in return statistics that there has been a shock to the market's growth outlook.
| YTD | |
|---|---|
| Philadelphia Semiconductor Index | -22.6% |
| S&P 500 Consumer Discretionary Sector | -19.3% |
| S&P 500 Information Technology Sector | -17.8% |
| Russell 2000 | -15.6% |
| Nasdaq Composite | -15.1% |
| S&P Midcap 400 | -11.6% |
| S&P 500 | -9.5% |
| U.S. Dollar Index | -8.2% |
| S&P 500 Consumer Staples Sector | +6.2% |
| S&P 500 Utilities Sector | +3.9% |
Briefing.com Analyst Insight
The good news is that the tariff announcement shock is over. A budding sense has emerged that the tariff headlines will have more positive connotations than negative connotations now that the negotiations have started. The market got this sense of things on April 9 when President Trump announced a 90-day pause on reciprocal tariffs for most countries, China excluded, that showed a willingness to negotiate better trade terms for the U.S.
That announcement launched an epic rally that culminated with the S&P 500 logging its third-largest gain in a single day since World War II. It was the pause that refreshed and removed the abject fear that had been building in the stock and bond markets and that was evident in the CBOE Volatility Index.
Still, it wasn't a race back to the old highs for the market. A lot of psychological damage had been done, and the market is savvy enough to know that the tariff actions will be a headwind for the economy and earnings growth. It just doesn't know how strong that headwind will be.
The economic data in the coming months will shed some light on that uncertainty, and here the prevailing expectation is that it will have more negative connotations than positive connotations. That is an objective view of the situation based on the return statistics seen above.
That could change with positive developments on the tariff negotiation front that are accompanied by some better-than-feared economic news. The market, though, isn't going to have the economic answers it is seeking for some time.
It is going to have to wait, and that wait will be hard. Consequently, its trading form will be erratic as participants digest the data and begin to attach some certainty to what is currently a highly uncertain situation.
