Investors - especially those managing big hedge funds and/or the books of Wall Street banks - look to be assuming the worst right now. Assuming the worst about tariffs. The worst about economic growth. The worst about inflation. And in turn, the worst about earnings. So much worry, so little time. So, sell everything now – as in, RIGHT NOW!
From a trading perspective, the battle cry among Wall Street’s "trader bros" and the hedge fund "masters of the universe" appears to be, "Sell (or in this case, short) first and ask questions later!
This is what happens when macro assumptions get thrown for a loop. One minute you are expecting S&P 500 earnings to grow by 10-14% this year. And the next, well... the estimates are all suddenly over the map and apparently it’s anybody’s guess.
All About Tariffs
Make no mistake about it; this market is all about the tariffs and the impact they may have on the economy, inflation, and earnings. So, it wasn’t surprising to see the market on edge earlier in the week. Or to see consumer confidence tanking. Or to see investor sentiment reaching extremely negative levels.
But as of Wednesday morning, there was still hope. Markets came into April 2nd with expectations for reciprocal tariffs that were purported to be "kind." You know, maybe a rating of 4 to 6 on a scale of 1 to 10 (with 10 being the harshest). But instead of the "bands" that had been talked about as little as 24 hours before the announcement, the President delivered an 11!
In other words, the tariffs were more severe than even the worst-case scenario and were "louder" than anyone was expecting.
To the surprise of many (and we all know how markets hate surprises), it appears the White House decided to take a strong-arm approach to dealing with what it views as unfair trading practices. And instead of a period of warnings, threats, and/or negotiations, the Administration is leading with the stick.
While it is likely (from my seat, anyway) that the most recent announcements will wind up being a period of negotiation with our trading partners, the markets didn’t like the news one bit.
Obliteration Day(s)
Although I can’t take credit for the phrase, the markets turned "liberation day" into "obliteration day" as S&P 500 fell just a hair less than -5%, the NASDAQ Composite dove -6%, while the Rusell 2K plunged -6.4% the day after the Rose Garden announcement.
Then on Friday, the tariff-tantrum continued as the indices dropped another -6%, -6%, and -4.5% respectively. (P.S. the Russell is now down more than -25% from the most recent high, putting the small-cap index in bear market territory). Ouch.
The worry, of course, is that hitting your trading partners with a stick will cause retaliations - or worse. And higher costs/inflation. And slower growth. And lower earnings. In short, not a desired result! (Hat tip to Mr. Emery for originating one of my favorite phrases.)
On that score, it is worth noting that according to CNBC, not a single Wall Street economist/analyst is projecting the White House plan will increase growth and earnings while reducing inflation in the end. No, to the contrary, Wall Street uniformly projects the opposite.
So, we will have to wait and see who is right here. Which, of course, creates uncertainty. Super.
Doing Just Fine, Thank You
There was some good news this week. You see, we got word that prior to the tariff-induced market freakout, the economy was in pretty good shape. Jay Powell told us as much on Thursday. Then Friday’s Jobs report showed the economy created 228,000 new jobs last month, which was almost double the expectation for ~130,000. Nice.
Bottom Line
At the end of the day, my take remains the same. We’ve got a “Bad News Panic” environment on our hands. And so far at least, I’ll opine that the market is largely in sync with the Panic playbook.
First, there is the panic decline (check). Then the relief bounce (check). The weak bounce is followed by retest lows as bed news returns (check). And finally, as the market comes to grips with the issue at hand, there is the bottoming process. Which can take time (or not, if the issue is resolved quickly).
In other words, we’ve seen this movie before. And the good news is the hero doesn’t die in the end! As such, it is important to remember that this too shall pass.
But If You Really Want to Worry
However, if you really want something to fret about, consider that the rating agencies probably don’t like the US playing fast and loose with the country’s finances or their efforts to change the way trade works. All of which is happening at a time when Congress hasn’t passed a measure to keep paying their bills.
Therefore, I fret that we may start hearing rumblings about a debt downgrade. But that is a worry for another day. Until then, here’s hoping that US trading partners start talking in earnest to resolve the budding trade war.