The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
Tariffs on, tariffs off
25% tariffs on Mexico and Canada are a big deal. 10% tariffs on China are a big deal. The markets reacted to these developments this morning and they weren’t sugar-coating anything. The S&P opened down 95 points and lost further value in the first hour of trading, bottoming at -116 on the day. At that time, the Mexican President released a statement that they had a productive conversation with President Trump and that the Mexican tariffs would be delayed by a month while both sides negotiate. The buyers came in furiously and the S&P spent the rest of the session down about 40 points. Yields rose on the front end of the curve and fell small on the back. Capital flow was only slightly elevated at 117%.
Last week, prior to Friday, markets assumed the tariff talk was all theater. On Friday, markets started to think that tariffs could be a reality. This morning markets started to worry about tariffs and the economic consequences. The news from Mexico gave markets a chance to breathe and convinced some investors that tariff talk is just a saber-rattling performance and that all dips should be bought.
So are tariffs going to happen or are they going to be threatened? That remains to be seen.
However, for those who think it’s all a negotiation-based performance, remember that the Canadian and Chinese tariffs are not being delayed and they are going into effect. Trump also threatened to tariff trade with the European Union today.
All of these situations will have to resolve themselves very quickly for the effects of the tariffs to be negligible. What’s the likelihood of that?
I think small.
Prior to tariff-talk, the US was in a Goldilocks economic environment. We had nice growth, strong labor markets, low inflation that was falling. And very importantly, the situation was *stable.* The US economy wasn’t in a precarious spot and the macroeconomic volatility was low.
The tariff-talk now injects significant volatility into the mix, which can push markets and economies into a negative state, even if the tariffs never amount to much. If tariffs end up hitting significantly, they could greatly affect prices and demand. They could certainly trigger recessions. These risks were not present in the market’s thinking a month ago. They are here now.
That makes a big difference. The market is different. Some investors saw today’s intraday bounce and conclude that the tariff talk is something to be ignored. That’s a flat-out mistake. Be careful.
See you tomorrow.
-Mike
IMPORTANT INFORMATION
This is general educational information and market commentary and is intended for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction.
All market and economic data herein is as of the date hereof and sourced from Bloomberg unless otherwise stated. The information is subject to change without notice and we have no obligation to update you.
This general market commentary is intended for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The views and opinions expressed constitute the author(s) judgment based on current market conditions, are subject to change without notice, and may differ from those expressed by other employees of Visdom Investment Group LLC ("Visdom") and Visdom. Past performance and any forward-looking statements are not guarantees of future results. It is not possible to invest directly in an index.
We believe the information contained in this material to be reliable and have sought to take reasonable care in its preparation; however, we do not represent or warrant its accuracy, reliability or completeness, or accept any liability for any loss or damage (whether direct or indirect) arising out of the use of all or any part of this material. Any securities referenced are shown for illustrative purposes only, and are not intended as a recommendation or endorsement by Visdom or by the author(s) in this context. The information presented is not intended to be making value judgments on the preferred outcome of any government decision. This information does not constitute Visdom research, nor should it be considered a recommendation of a particular investment strategy or an offer or solicitation for the purchase or sale of any financial instrument. Investing involves market risk, including the possible loss of principal. You should speak to your financial advisor before making any investment decisions. Visdom and its affiliates do not provide legal, tax or account advice so you should seek professional guidance if you have questions.
