For those of you who would prefer to listen:
I will start by saying, there is nothing normal about this environment.
We entered the year knowing big changes were coming from the White House. When it comes to the massive debt, excess spending and trade, something had to be done. The status quo was simply unsustainable. That said, we certainly did not anticipate the velocity of activity coming from the Oval Office. Clearly the Market didn’t either. Our thinking all along was that President Trump cared about the Stock Market, considering it a scorecard for his Presidency. That was certainly the case his first term. This second term has already proven so much different.
Global markets underwent a seismic response to the announcement of sweeping tariffs last week. The President called it “Liberation Day”. It was more like obliteration day. The Market clearly did not believe Trump would go as big or far as he did. It had gotten used to grandiose rhetoric out of the Oval Office, followed by delays. It led to collateral damage. Aftershocks continued into this week. The shocks were felt around the world.
It’s been a menacing question as to whether President Trump planned to use these tariffs as a negotiating tool or policy. It wasn’t clear. It didn’t seem clear even within his cabinet. It sure seemed to clear up this week. The Market sell-off didn’t seem to faze the President; Until it did. A 90-day pause on tariffs was announced Wednesday. That brought some much-needed reprieve. But realistically, it’s just a timeout. The issue is still there.
Was that a win or a flinch by the White House on Wednesday? It sure seemed like the former. Bond yields exploded higher to start the week. With so much confusion and stress, the Bond Market seemed to have enough of this. It punched back hard. Tariffs are inflationary. That explains some of the rise in yields. Margin calls could have triggered selling too. But Treasury prices have been hit because confidence in the US and its assets has legitimately been shaken. That is a very big deal. And it’s not good.
The Bond Market has been the driver. It has certainly been driving stock prices. It is seemingly what drove the decision to announce the 90-day pause. Treasury Secretary Bessent has been pushing for lower yields, not higher. The administration was taking a victory lap when the 10-Year went below 4% last week. Then it reversed and reversed hard. The 10-Year hitting 4.5% must have made them sweat. Remember what James Carville said about the Bond Market. It can intimidate anyone. The Bond Market doesn’t get bullied. It bullies. The Bond Market just bullied the Trump administration.
That led to an epic rally. The S&P exploded higher, nearly 10%. It was the largest single day percentage gain since the Financial Crisis and the 3rd best since 1950. The Dow shot up nearly 3,000 points. That was its largest single-day point move in history. And you know the Dow has a storied history. The Tech-heavy NAS led the charge up a whopping 12%, its biggest gain since the Dot-com days. It all came on record volume for the US exchanges. Schwab said they’ve never had trading this heavy, ever. Ever’s a long time. The rally spread overseas. The Japanese Nikkei jumped 9%, recording its second-best day ever.
Of course, with low confidence, there were fears of whether the rally would stick. Thursday gave roughly a third of it back, in another volatile session. At one point it looked like all of Wednesday was going to get erased. But aggressive selling was kept at bay. Friday flip-flopped between red and green all day, until a late session burst sent stocks sharply higher into the weekend.
Here’s the deal: This 90-day pause, it applies to approximately 75 countries; All but China. And tariffs on China went up again and again. The tariff rate imposed on China is now 145%, effective immediately. I believe that was the third increase this week. It’s hard to keep track of all this. China responded by raising its tariffs on US imports to 125% from 84%. Importantly, Reuters reported some chipmakers exempt. China stated, since US goods are no longer marketable in China, it will not retaliate further, calling the Trump administration’s actions a “joke” and saying it no longer considers them worth matching.
China made it clear it would still defend its rights and interests. In his first public comments on Trump’s tariffs, President Xi Jinping asked the European Union to join China in opposing the US bullying and stressed there are no winners in a trade war. He said that China does not want a trade war but will “by no means sit by when the legitimate rights and interests of its people are being hurt and deprived.” Of course, American consumers are hurt by what’s about to be higher prices. It might be too late. Amazon has already canceled orders for multiple products made in China in anticipation of the tariffs. And that was before they were increased.
Even though the Stock Market rallied, Bonds have merely stabilized, at best. That 4.5% Treasury yield seems to be the marker to track. Above, stocks have gone lower. Below, stocks have gone higher. The Yield Curve has steepened with the front-end falling while the back-end stuck. The 30-Year yield has been suspiciously tethered near 5%. 2-Year yields are falling, seemingly pricing in the economic slowdown and potential Fed cuts. The Fed only has influence on the front-end. The Dollar has been really weak. And the 10-Year went into the weekend back to 4.5%.
Confidence in America being the rock of the Global Financial System is being tested, big time. This time, the United States is not the safe haven. That’s new. In fact, it’s the opposite. The United States has been the source of the global economic instability. Rumors have circulated that Japan and China have been aggressive sellers of Treasuries. They are the 2 largest foreign owners of our debt. This week was a critical test. There were multiple Treasury auctions. It would prove whether America’s debt was still coveted. The good news, it is. Both the 10-Year and 30-Year Bond auctions had really strong demand. The bid to cover was 2.65. Indirect bidders took down 88% of the $39 Billion and $22 Billion auctions. Dealers only took 10.7%. That shows real demand. The average had been 13%.
Gold has replaced the Dollar and US Treasuries as the chosen asset for money seeking safety. You can argue that short-term Treasuries have maintained that safety net role too while longer dated maturities have sold off. But something important to recognize, despite the recent spike in yields, both 10s and 30s are still below their January levels. If we were already in a crisis, those high levels would have blown out already. They’re getting close, but they’re not quite there yet. We are watching that like a hawk.
The fact is, the United States and China need each other, from an economic standpoint. The 2 largest global powers are so intertwined with their respective economies. What’s more, the Global Economy relies on them too.
Apple is caught squarely in the middle of this Trade War. Despite the recent moves to diversify its manufacturing into India and Vietnam, over half of iPhone production still comes from China. China also produces 50% of all Macs and over 75% of all iPads. China is also a major market for its products. Nearly 20% of Apple’s revenue comes from the Chinese Consumer.
So, at 145%, the tariffs on China could spike the price of an iPhone well over $2K. Apple sells over 220 Million iPhones a year. Its biggest markets are the United States, China and Europe. The cheapest iPhone 16 model was launched in the US with a sticker price of $799. It could cost as much as $1,158 after tariffs. The most expensive phones could see $2,500.
Forbes suggested that if Apple was forced to manufacture in the US, an iPhone could cost as much as $30,000, provided the infrastructure is in place. Talk about sticker shock. That might be a whole lot of hyperbole, but you get the point. Labor is not the biggest issue. China is no longer the cheapest to manufacture. It’s more about the gap in supply chains and even more so about the required skills to manufacture an exponential number of devices every year.
Apple CEO Tim Cook has stated that even if the US were to start building these capabilities today, it would take a generation to reach the scale required. Manufacturing iPhones domestically could reduce output by like 90%. It would also drastically increase costs and cripple Apple’s ecosystem. Cook is believed to have influence with President Trump. Remember, he was one of many Silicon Valley CEOs seated behind the President at the inauguration. The Apple leader can’t be pleased with what’s happening. Apple is not standing idle. Sources say the company airlifted 600 tons of iPhones to get ahead of Trump tariffs.
The United States is a Service Economy with 70% of GDP coming from Consumer spending. So, whether it’s iPhones, shoes, toys or cars, prices have been kept lower by manufacturing overseas. No cars are actually made in the United States, assembled in multiple locations, with parts sourced from the United States. Estimates show car prices could rise roughly $12K in response to these tariffs. One Street analyst estimates it would take three years to move 10% of the auto supply chain to the US and cost “Hundreds of Billions of Dollars with much complexity and disruption. You simply can’t build factories overnight”.
So, this is what’s causing so much stress and confusion to Corporate America and beyond. There’s also a major skill shortage. Besides, it’s not clear how many Americans even want these types of jobs that have historically rivaled sweatshops. Comedian Dave Chapelle said it right: “We want to wear Nike’s, not make them!”
West Texas Intermediate crude dropped below $60 a barrel for the first time in 4 years. The price of Oil fell 20% since inauguration. This is good news in the pursuit to contain inflation. The Consumer Price Index (CPI) recorded a surprising drop in March. But it also signals there could be tough economic times ahead. Consumers have gotten cautious. Spending has slowed. Falling demand sends prices lower. You don’t drive as much if you are concerned about money. The price of Oil jumped back above $60 heading into the weekend. That’s a level that seems more in balance.
Business is a confidence game. Corporate America likes certainty. The President has been losing the confidence of business leaders around the globe. Placing massive and disproportionate tariffs on both our friends and our enemies is essentially launching economic warfare. We run the risk of destroying confidence in America as a trading partner. That is such a foreign concept, it seems altogether unthinkable. America is the place to do business. It is the premier market to invest capital. Treasury Secretary Bessent said he liked certainty when he was running his hedge fund. He asserted Wednesday, “Now we have it again”. That’s not evident throughout Wall Street or Main Street. But it seems apparent that the Treasury Secretary has quickly become the most trusted member in the Trump administration by Wall Street.
Corporate confidence is on display now. It’s slipping. Delta reported earnings this week and pulled its guidance for the rest of the year because it is flying blind with so much uncertainty. CEO Ed Bastion said travel demand has stalled a bit, and the airline will operate as if it’s heading into a recession. It’s not alone. Walmart kept its guidance for the rest of the year, but did acknowledge the uncertainty around tariffs. Walmart is the largest buyer of Chinese goods. It’s been estimated that 60% of Walmart merchandise comes from China.
We will see more of this type of commentary this Earnings Season. And it’s here. The Banks led things off Friday. JP Morgan, BlackRock, Morgan Stanley and Wells Fargo all reported strong earnings. But that’s in the rearview mirror. What’s ahead has become quite murky. The uncertainty is weighing on stocks.
This is some really rare price action for the Stock Market. The Thursday/Friday sell-off last week was highly unusual. It was only the third time this decade that the S&P 500 shed more than 10% in two days. The other two times were at the start of Covid. There have been some massive price swings that carried over into this week. The S&P saw an 8.5% swing Monday followed by a 7% intraday swing Tuesday which set up the massive 11% swing on Wednesday’s record rally. Thursday and Friday saw 4.5% and 3% daily price swings, which are much higher than average, but seemed so tame in comparison. The weekend could not come fast enough.
The Market has been moving at lightning speed. This is all happening so fast. The Volatility Index hit 60 this week. That was the highest level since the Covid crash. Then it fell to the 30s, marking the biggest one day decline ever. For perspective, the Volatility index spent most of last year in the teens. VIX above 30 brings major prices swings. We’re living it.
Taking a step back, it’s essential to remember that things were pretty frothy to start the year. There were some bubble-like conditions. AI was still all the rage. The Market also rallied in anticipation of a new White House, bringing less regulations and pro-growth policies. Of course, that feels like forever ago. However, the policies have not stimulated growth. Quite the contrary. Corporate America stalled with the confusion and chaos around global trade. It seems like a battle between America first versus America alone.
This 21st century has not been exactly normal either, at least from a financial standpoint. The US tripled its money supply in the past 18 years. It held interest rates at zero for nine of those years. That was in response to the Financial Crisis in 2008. It did it again during Covid. Money was free. There’s a generation that thinks mortgage rates should be 3.5% and the Stock Market only goes up. There’s no such thing as free. We are still paying the price for that.
So where does this all leave us? It looks like the fast-track to recession has been avoided. At least for now. The 90-day pause provides significant relief. But the uncertainty and trade volatility remains a major overhang. Consumers and Companies are going to be treading lightly, with shallow confidence, knowing how quickly things can change.
The World Order has definitely changed. The emphasis of free markets and globalization have been replaced with populism and country first approaches. It’s being seen the world over. Brexit was 10 years ago. We’ve experienced a decade of monumental shifts in the Global Economy. The pandemic, trade wars, populism and territorial contests have brought back Cold War geopolitics. It’s definitely a different world we live in. Things have changed so drastically since the policies born out of World War II. The West is no longer united. Europe is weaker. The East has emerged more powerful. And the Digital Age is driving all things political, geopolitical, military and economic. Planet Earth is a complex place.
Wednesday’s relief rally was one for the record books and holds the potential to become a meaningful intermediate-term low. The extremes that were evident in volume and bearish sentiment support that. Things got so washed out. It sure was refreshing relief to see green back on the screen for stocks heading into the weekend with preserved weekly gains. But it’s also likely that the low levels get tested, to prove their worth. We definitely expect volatile price action to continue for a while.
We certainly don’t have all the answers. But this is my attempt to try to make sense of what’s going on and why. It remains a very fluid situation which has us staying very nimble.
We may not have exactly been here before, but we sure have felt this way. Investing tests mettle. Investing requires patience. Investing takes guts. Investing in American companies has been the greatest wealth creator in human history. The Stock Market has been that vehicle. History has proved that America has a knack for finding its way out of seemingly impossible situations. This is another test which in our world means opportunity. We keep navigating through the challenges. We’ve got your back.
Have a nice weekend. We’ll be back, dark and early on Monday.
Mike
