This Market. March Issue Moved to the 26th
First, a bit of housekeeping, then thoughts on the market.
We’re going to push next week’s March Issue of Cabot Early Opportunities back by one week, to March 26.
There are three reasons. First, the market is very much on edge and another week may help it calm down and allow potential leaders to show themselves a little more clearly. Second, the March FOMC meeting is next week, and both the rate decision and Fed Chair Jerome Powell’s press conference will be on Wednesday. That adds another layer of uncertainty on our previously planned publishing date.
Lastly, my kids are on March break and we just arrived in the Bahamas, where we will be for the next week. It would be challenging enough in a calm market to take time away from the family to put together an Issue I’m happy with. In this market, with the FOMC meeting, the only sensible thing to do is move the Issue back a week.
On to the market …
Trump 2.0 is disrupting the federal government, global trade, foreign policy and global equity markets.
As a result, many analysts are cutting estimates and year-end targets for the S&P 500. This is a very uncertain environment, which is not good for the equity markets. And while we could get a rally any day, the big-picture issues are not likely to be resolved anytime soon, unless the Trump administration changes its tactics.
The market enjoyed a little bounce on Tuesday but was hit again yesterday. It’s still working to find a level of support from which to mount an eventual recovery.
As we’ve seen before, this is a process, not an event. Nobody knows if we have reached that level yet.
We’ve been through these types of volatile markets many times in the past. While the drivers of the volatility are often different, one of the consistencies is that it’s best to exercise patience and let new leaders show themselves. They always do.
In this case, the main drivers of the current market correction are Trump’s tariffs/trade war and massive disruptions in the federal government.
Trump himself has acknowledged that his administration’s agenda will require a period of “re-adjustment,” and he didn’t rule out a recession. That has not helped the market.
Trump has been turning up the dial on tariffs, which he says are needed to create a more fair environment for U.S. exporters and to force more companies to produce goods in the U.S. He believes things like aluminum, steel, semiconductors and pharmaceuticals should be produced here and that doing so is a matter of national security.
Trump also believes his tariff strategy will help to slow the flow of migrants and fentanyl over the northern and southern borders.
He has not backed down and appears to welcome a full-fledged trade war with Canada, Mexico, China and the E.U.
In response, other countries are increasing and/or imposing tariffs on the U.S. In the last couple of days the EU has threatened 50% import tariffs in American whiskey, motorcycles, motorboats, poultry, soybeans, chewing gum and other goods. Canada said it would impose a levy on an additional $20.6 billion of U.S. imported goods.
A full-fledged trade war was not the consensus expectation when stocks rallied upon Trump’s victory last November.
Most market observers, myself included, thought Trump would use tariffs as part of a negotiating strategy and would take stock market reactions into consideration.
It appears we were wrong.
Trump has indicated that the dial will turn further when reciprocal tariffs on many countries (including Europe and India) are announced on April 2.
The Trump administration’s analysis on tariffs may include some very fuzzy math. A week ago, Commerce Secretary Howard Lutnick said, “We’re going to make the External Revenue Service replace the Internal Revenue Service.”
Responding to that comment, economist Ed Yardeni recently wrote, “In other words, revenues from tariffs will replace revenues from taxes on individuals and corporations. That’s simply dangerous and delusional nonsense. It certainly isn’t passing the sanity test in the U.S. stock market.”
In response to the Trump administration’s disruptive methods, recession odds have increased and the stock market has given up all of the Trump rally, and then some.
Since the market closed on November 5, 2024 (the day before Trump won the Presidential election), the S&P 500 is down 4.4% and the Nasdaq is down 4.8%. The S&P 600 Small Cap Index is down 12.7%.
Perhaps more alarming is the market’s decline in the last three weeks.
Since the S&P 500 hit a record high on February 19, the index is down 10%. The Nasdaq is down 13.2%. The S&P 600 Index is down 12.7%.
All three indices are now in technical corrections (down 10% or more from a recent peak).
What do we need for this market to firm up?
We need less uncertainty. It’s not uncommon for there to be more uncertainty when a new president takes office as everybody adjusts to new policies. But this is next level.
More specifically, we need the Trump administration to find a way to end the tariff war, or at least establish a more measured back-and-forth negotiating style, find a way to more quietly shrink the federal workforce, and establish a less confrontational way of dealing with other foreign leaders.
The market hates the intense uncertainty of this erratic governing style. And for good reason. At any moment some comment or headline can pop up that sounds like it could have a meaningful impact on a particular company’s revenue, profits, supply chain, etc., only to be followed by comments that reverse the outlook, or make it worse.
Consumers are in a similar boat, not knowing which direction the wind will blow from one moment to the next.
This is a drastic reversal from the economic optimism that quickly followed Trump’s victory, when tax cuts, a more efficient government and a market-friendly administration were givens.
This all sounds pretty dire. But there are a few potential positives.
The 10-year yield has fallen back from 4.8% in mid-January and seems to be finding comfort below 4.4%.
Tuesday’s CPI inflation print was cooler than expected, as was yesterday’s PPI inflation print.
The market is no longer trading at record highs, and the number of bulls out there has faded quickly. From a contrarian perspective, that’s good.
Some analysts, including strategists at JP Morgan, think the market has sold off enough that there is ample room for upside surprises moving forward.
But, again, we need the Trump administration to take a more measured approach to calm equity markets and avoid a recession.
Now, the Fed.
Next week the FOMC will meet. I don’t expect the Fed to cut.
Fed Chair Jerome Powell has signaled that the Fed is in no rush to cut, saying as recently as last week that the economy is “fine” and “doesn’t need us to do anything, really.”
The Fed tends to prefer to look at the personal consumption expenditures (PCE) price index as its preferred inflation measure. That data for February isn’t released until next Friday (after the FOMC meeting). And with the impact of Trump’s tariffs yet to hit the CPI, PPI or PCE, it’s extremely unlikely a data-dependent Fed would front-run the data and make a cut, especially when the eventual tariff impacted data would likely show an increase in the inflation rate.
That all said, looking out past the March FOMC meeting we may well see that the Trump administration’s policies are harming the U.S. economy. In that scenario we would likely need the Fed to ease (cut rates) to shore up the U.S. stock market, otherwise the sum total of Trump administration and Fed policies will likely act as major impediments to growth.
Lastly, it’s worth noting that the current Federal Funds Rate (FFR) of 4.25% - 4.5% is well above that of the developed markets Tariff Man is going after. The ECB recently cut rates to 2.5% and the Bank of Canada just cut to 2.75%.
Will Trump continue to beat the war drums, or try to make some deals?
I grew up in Vermont and attended UVM for both undergrad and grad school. One of the buildings I spent a lot of time in was called the Aiken Center, which was named after Vermont Republican Senator George D. Aiken.
Aiken is often quoted as saying, with respect to Vietnam, that the U.S. should just “declare victory and go home.”
While his actual words weren’t quite that simple and direct, I keep thinking the concept might be one that Trump would do well to consider. Just declare victory and end the tariff war!
The bottom line here is that there is still room for the Trump administration to fly at an altitude with less turbulence, which the market would likely respond positively to. But it’s not time to bet on that scenario just yet.
Be cautious out there.
Remember, the March Issue of Cabot Early Opportunities will be published on March 26, one week later than the previously scheduled date.
Please email me at tyler@cabotwealth.com with any questions or comments about any of our stocks, or anything else on your mind.
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