For those of you who would prefer to listen:
What a difference a month makes. The crash has been repaired. Well, sort of. The S&P 500 erased all of the losses. It’s now green for 2025. The 180 degree move from the White House on tariffs triggered the powerful rally. The Stock Market soared nearly as fast as it fell.
What propelled it was a meeting in Switzerland. That happened last weekend. There wasn’t a deal between the US and China. It was called a pause. For the next 90 days, US tariffs on Chinese goods have come down from 145% to 30%. It represents a 10% reciprocal tariff and 20% related to fentanyl. Conversely, China tariffs on US goods will come down from 125% to 10%.
The tariff relief was much more substantial than expected going into the talks. It had been reported the White House could lower the rate down to 50%, while President Trump floated 80% tariffs. Treasury Secretary Scott Bessent stated that talks in Geneva had established one essential fact: that “neither side wants to decouple.” That’s significant for the Global Economy and the Market.
A couple things have been made clear: The White House wanted an exit ramp from the high tariffs it had in place. The Market has said all along that tariffs are a really bad idea. In a capitalist society, the Market always wins. The way we see it, it did again this time. This is cause for both comfort and celebration.
But now is the hard part. Washington and Beijing need to hammer out the details and mutually agree to them. This type of activity historically takes months, if not years. But in these modern times, people tend to prefer and expect instant gratification. That has set up bursts of enthusiasm followed by disappointment. That’s volatility.
After obliteration day, April 2nd, 2025, which triggered a crash with stocks plummeting and yields soaring, the Market wised up with the belief that Trump 2.0 never really meant its own trade rhetoric.
It quickly became clear there was no big constituency outside the White House pushing for tariffs in the United States. Corporate America didn’t want it and the American people were paying for it. All the signs indicated that they aren’t good politics.
A base case might be a universal 10% tariff plus a massivelevyof as high as 80% on China. Four months ago, that would have been described as a nightmare scenario. It still is. An awful lot is now riding on the administration never having meant a word it was saying. The recent rally has certainly priced in a better outcome.
President Trump said tariffs won’t revert to 145% but could rise substantially from current. De-escalation as a short-term upside risk to GDP growth with the potential for renewed import front loading in Q2 as companies take advantage of this pause. Another round of ‘pull-forward’ has already begun. Container rates jumped over 30% in an instant. Global commerce is back on.
Earnings Season has been pretty solid thus far as the period reported was prior to the trade war talk. The most recent University of Michigan ConsumerSentiment survey was weaker than expected. In fact, it was the second lowest on record since 1952. That’s saying a lot.
Walmart released its report card this week. The company beat the earnings expectations and stuck by its full-year forecast. That calls for sales to grow 3% to 4%. Consumer spending has been beyond resilient. Walmart knows. Walmart is seeing consumers across all income levels prioritize value and delivery speed. America shops at Walmart.
The mega retailer is an effective barometer for the health of the Consumer, particularly in this environment. It is the largest employer in America with Thousands of stores and a vast customer base that cuts across age, income and region. And equally important, Walmart is the largest buyer of Chinese goods. An estimated 70% of its inventory comes from China. Walmart has felt the effects from tariffs as much as anyone.
“We’re wired for everyday low prices, but the magnitude of these increases is more than any retailer can absorb. It’s more than any supplier can absorb. And so I’m concerned that consumer is going to start seeing higher prices. You’ll begin to see that, likely towards the tail end of this month, and then certainly much more in June.” That was the message from Walmart CFO, John Rainey.
“Given the dynamic nature of the backdrop, and the range of near-term outcomes being exceedingly wide and difficult to predict, we felt it best to hold from providing a specific range of guidance for operating income growth and EPS for the second quarter. With a longer view into the full year, we believe we can navigate well and achieve our full year guidance.”
The Market liked the message from Walmart. Everyone has been trying to navigate the uncertainty and the uncertainty has been shrinking. The worst case scenario as it applies to tariffs seems to be off the table. The rally saw the Market’s fear factor nearly evaporate. The VIX recorded its largest single-day decline, ever. It’s back to levels seen when the Stock Market was at all-time highs, back in February.
This week the S&P blew through that brick wall like a cannonball. The band around 5800 was resistance. Now it’s support. It’s the level it started out the year. It’s the level it sat at before obliteration day.
The Stock Market is now flat on the year, as if nothing happened. But something happened. Something definitely happened. It sort of begs the question: What was this all about anyway?
And then there’s this: Bond Yields have moved back to the highs that forced the flinch in the Oval Office in April. It had been sniffing out a tax bill in Congress that is not addressing the ballooning deficits and debt. The Bond Market doesn’t like that. Word that the bill got sunk actually sent stocks and bonds higher Friday. But Moody’s stripped America from its lone AAA credit rating late in the day. That adds more pressure. Keep in mind, the Stock Market is no longer cheap. The volatility evaporated this week. It will most likely return again.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
