Get ready for more volatility. Between Fed inaction, tariff threats, and earnings worries, it's all on the table
KEY TAKEAWAYS
MY HOT TAKES
Knuckle down. I know. You need some rest. You just want a normal week. What is normal? Well, how about a week without any surprise tariffs from the Administration? Maybe no bombshell “discoveries” from China that would sink your AI portfolio? What about a week like the good ol’ days (last year 😆) where markets were just up because everyone is happy and there is no rain in forecast? Yeah, that would be nice.
Well, now that the last FOMC meeting before May is out of the way and the result was… um, not as bad as it could have been. We, indeed, were served up a big nothingburger from the Fed, which I suppose is probably good when suffering from stomach upset–we’ll take it.
So, now what? Just kind of lay low and hope for the best. Well, NO, let me start with one of the oldest Wall Street sayings: “hope is not a strategy.” Let’s maybe focus just a bit down the road so we can anticipate what to plan for. I know that long-term planning may be a challenge at the moment, but let’s not worry about that today. Let’s think of this like we would be planning for a weekend trip.
What should we pack? Will it be warm or cool? Will it rain? Will it snow? What will we do on our get away? Do you see where this exercise is going? You often make plans like this in your real life. Let’s for a moment think about that sort of near-term planning in the markets.
Ok, then, first up are–no surprises here–tariffs. They are very much on the table. In fact, there are some tariffs, particularly a 20% tariff on all Chinese Imports and a 25% tariff on all steel and Aluminum imports. Oh, and then there are the 25% tariffs on everything from Mexico and Canada except 10% on Canadian energy imports. A portion of those (all goods that are USMCA compliant) are on hold until April 2nd. Some persist, but April 2nd is approaching.
Speaking of April 2nd. The President referred to that as “Liberation Day.” You may recall several weeks back at one of the President’s public signing events in the Oval Office, he brought out Commerce Secretary Howard Lutnick and they riffed on reciprocal tariffs. Those are tariffs on countries that are currently taxing American exports. The riff got sloppy for a moment when they brought up the topic of VAT (Value Added Tax) taxes, but they tightened it up and ended the verbal journey on simply reciprocal taxes.
The President kept saying that they would happen soon. Soon? How soon? At first, it wasn’t clear, but at some point, Sec. Lutnick seemed to agree to the beginning of April when his team would be done analyzing the trade landscape. The President then latched on to it and April 2nd became THE day. All this, hashed out, live, in the oval office! That all has since morphed into Liberation Day, which is now expected to be the day of final reckoning. It sounds ominous, but the markets are at this point counting on a measured package of taxes. So, let’s just refer to that as a slight chance of rain. Not so much because of the new taxes but the possibility of additional confusion. Also, the markets have very much been adhering to the old Wall Street Strategy of “buy the rumor and sell the news” lately.
Next up? Earnings. Yes, earnings. I know that it seems like we just went through this exercise, but guess what, earnings season is just around the corner. JPMorgan Chase will kick off the official season on April 11th. And the season will surely begin with a bang, as the Financials which generally go first in the procession, had a stellar showing last earnings season and had experienced respectable gains up until the recent market pullback. Last quarter, JPMorgan delivered a year-over-year top line growth of 21.2%! No wonder the stock rallied in the aftermath of its announcement. Ok, so here is the thing. Fourth Quarter earnings season was, for the most part, very solid with companies exhibiting respectable earnings growth. Now we are getting ready for the first quarter results, and analysts are expecting JPMorgan earnings growth to decline by -1.5% from a year ago. That can’t be positive. Additionally, a big part of the thesis for owning the financials, other than their recent topline growth, was increased, fee-based, transactional business under the new easier regulatory environment. Well, while there has been lots of talk about easing regulation, we have not seen much of it yet. Moreover, the tumultuous markets have slowed M&A and fund raising, which are also likely to have a negative impact on the banks. I am not beating on Financials, but they do tend to set the tone for earnings season, and overall, analysts are expecting earnings growth to slow next quarter.
While we are on earnings, it is important to note that those tariffs mentioned above 🙃☝️are in force, meaning the companies about to report first quarter earnings have been paying tariffs to US Customs on those covered items. We all agree at this point that those increases will ultimately hit consumers with inflation, but the first step in that chain of events is a decline in corporate margins. I would say, with high confidence, that we will be hearing a lot about tariffs and their impacts on margins in this upcoming earnings season, and those comments are likely not going to be received in a positive way. I would also posit to you that despite lower growth estimates, tariffs have not been fully factored into estimates just yet. Hmm, it seems like we are expecting some cloudy and chilly conditions.
Now let’s talk about the labor market for a moment. Next Monday, we tear March off the calendar, which means that we will be getting monthly employment numbers next week. Liberation Day is on Wednesday and the employment situation is on Friday. When are all those DOGE layoffs going to hit the market? Well, you can do the math and try to make sense of all the releases out there, but it will be tough to come up with a real figure of now-unemployed government workers. Remember that many of those layoffs have delays and buyouts, so it is unclear when those will actually show up in the numbers, but they will at some point starting THIS MONTH. Also, very little has been said about all the contractors that support the government. You know, all those folks whose contracts were cancelled by DOGE? I can tell for a fact that layoffs there are going to start hitting the tape starting this month. The Fed doesn’t seem too concerned about it based on the latest comments by the Chairman, though the FOMC expects the unemployment rate to increase to 4.4% by the end of the year. I would say… well, maybe overcast conditions… no, more like partly cloudy.
So, where am I going with all this? I want to prepare you, my friends, for a bit of rough weather. Am I changing my outlook for recession? No, not yet, but I can tell you that there are definitely clouds on the horizon; not necessarily the ones that guarantee a recession, but rather that guarantee rough seas for the markets. We are far from out of those rough seas at the moment. Maybe pack a light rain jacket, and a sweater for our weekend getaway. Come to think of it, maybe we should pack some light clothing in case the weather turns around, as it often does. Similarly, these rocky market conditions can turn around as well and the clouds can certainly dissipate. That would take some definitive measures by the Fed or some meaningful legislation or policy shifts. Those could happen. What they look like and when is hard to say right now. Just pack the raingear. You know, an ounce of prevention.
FRIDAY’S MARKETS
Stocks bounced along on Friday, ultimately closing slightly positive as options traders reset their positions on a triple witching day. No news was good news on a Friday capping off a low volume week which had the makings of another loser in a string of four consecutive weekly losses, but traders put their feet down snapping the streak. Was it Powell or is the market just getting used to the new normal of ambiguity and trade friction? Or, are the sellers simply tired of winning?
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