April 3, 2025
Key Observations:
- Global Pushback: Trump’s newly announced tariffs have faced near-universal rejection from trading partners, governments, and market investors. Retaliatory measures are being prepared worldwide, amplifying uncertainty.
- Market Reaction: As expected, equity markets worldwide are under pressure, with pronounced selling in US technology and consumer discretionary sectors. Early trading shows broad-based declines across global markets, possibly more in the US than abroad.
- Political Divisions: Congressional dissent is bipartisan, signaling legislative friction this week and next. Meanwhile, researchers, like CNBC’s Steve Liesman, are scrutinizing the methodology behind the administration’s tariff calculations.
Macro Implications:
- Short-Term Volatility: Market prices will remain volatile but should stabilize once clarity emerges. Current declines, while sharp, do not yet signify a structural bear market—even a further 10% drop from recent highs would align with a historically moderate bear market.
- Critical Unknown: The ultimate economic impact hinges on two factors:
- US Consumer/Worker Response: If macroeconomic data over the next month shows acceptance (e.g., sustained spending, no labor unrest), downside could be contained.
- Retaliation vs. Negotiation: Escalation (e.g., Reciprocal tariffs) and the absence of back-channel agreements may intensify disruptions, potentially leading to a generally recognized recession in the US by this summer.
Base Case vs. Tail Risk:
- Base Case (60% Probability): Measured retaliation and eventual bilateral negotiations limit GDP drag to 0.5–1.0%; markets recover after initial selloff.
- Bear Case (30% Probability): Protracted trade war triggers layoffs, consumer retrenchment, and a 2–3% US GDP contraction—a severe recession but not a depression.
- Tail Risk (10% Probability): Unchecked escalation, widespread protests, and demand collapse deepen the US GDP downturn beyond 3%, though this remains unlikely unless there are serious policy mistakes and members of the Trump team start departing.
Investment Strategy:
- Near-Term: Overweight short-duration Treasuries until the dust settles. Maintain defensive positioning in quality large caps with low trade exposure, e.g., US utilities and healthcare. Avoid premature bargain-hunting in cyclical tech and discretionary names until you see cyclical lows on the Weekly data charts using the RSI-7 technical indicator, and preferably trend reversals in the major indexes using the MACD indicator.
- Catalysts to Watch:
- Upcoming consumer sentiment and payroll data for early labor/consumption stress signs.
- Whispers of back-channel negotiations (or lack thereof) from diplomatic sources.
Conclusion: While I seriously disagree with his methods because doing daily business has been rendered near impossible, Trump’s attempts to control the US government and consumer spending, budgetary deficits, and growing debt are justified. In enforcing a new age of austerity, volatility is assured, but panic is unwarranted. Still, for us investors, vigilance is critical. Flexibility to pivot on new data—not MAGA beliefs—will separate the winners and losers in this environment.