Economy
On April 2, standing in the Rose Garden, President Trump announced his administrations plans for sweeping tariffs. No country was spared, and the measures were significantly harsher than the market was expecting (and the market was already expecting something harsh). The administration is clearly not looking for minor adjustments to not only our economy but the global economy as a whole. They are looking to reshape the way business is done with and in America. Sometimes economic turmoil can feel like we're in a snow globe that's been shaken up. This feels more like the snow globe has been thrown on the ground.
A few months ago the consensus opinion was that we'd see slow but positive economic growth, cooling inflation, and the Fed throwing us a couple of bones in the form of rate cuts because they could (not because they had to). I'm not sure there is a consensus opinion on where things go from here. Let's examine a few possible outcomes in alternative universes.
Fast forward a couple of years and let's say we all wake up and think back to this week and about how the tariff policy was a massive success. In order for us to feel that way, we'd have seen a resurgence of manufacturing jobs here in the US. We'd be importing fewer goods, and exporting more goods, and have a trade deficit that had shrunk dramatically. Inflation would not have runaway higher. Countries like China, Canada, Mexico, and EU nations would have come to the table to negotiate better deals with Trump following his April 2 Rose Garden announcement. We'd be less reliant on other nations for key strategic resources, such as semiconductors, steel, and pharmaceuticals.
Now let's flip the script. We look back on this week years from now and can't believe what a colossal policy mistake that was. The tariffs caused higher inflation, and the Fed struggled to get it under control with rate cuts. Not only did other nations not show up to the negotiation table, but they retaliated, and the back and forth continued. We didn't get the manufacturing reshoring because companies decided to keep their plants overseas despite the tariffs. America's "brand" was damaged on the global scale and other countries have a less favorable view of doing business on our terms.
I don't know which of these outcomes is more or less likely to happen. I am neither an economist nor a handicapper, just a guy writing an email every week to try to figure out what he thinks. This is a high-risk high-reward gamble. There's an endless possibility of paths we take from here. Some with good outcomes, others bad, and still others mixed. It's difficult to discern which path we're on right now. We'll continue to focus on the macro data as it comes out with an open mind that at any moment we can see things change on a dime.
We'll wrap this section of the email with a bit of good news because who couldn't use that. The March payroll data came in better than expected with 228,000 jobs created last month vs. expectations for 140,000. The unemployment rate rose from 4.1% to 4.2%, but in large part due to an increase in the labor force participation rate. Mortgage rates declined to the lowest level in months.
Markets
That sucked. The S&P 500 fell by more than 9% this week. Not a typo and I didn't mistakenly move the decimal point. The market moved higher in the first three days on misplaced optimism that the tariff announcement would be more lenient than previously expected. Maybe it was because we were getting hints from the White House that the reciprocal tariffs would be milder. Whatever the reason, it was clearly wrong in hindsight. The market crashed by more than 10% in the final two days of the week in response to the announcement. Maybe we'll find out in the future that this initial move lower was an overreaction as can happen from time to time. Or maybe it wasn't enough. We're seeing in real time the market reprice expectations for corporate earnings for an unprecedented situation. Setting aside the reason for the selloff, the sudden price movements are reminiscent of how the market acted during the COVID pandemic. To that point, if it's of any value, you've seen this before.
No, we haven't lived through a market that is down because of this particular reason. The truth is, every selloff of this magnitude happens for an unprecedented reason. It's always different and yet it always feels like this is the worst it's ever been. There's a quote by Marcus Aurelius that goes, the obstacle in the path becomes the path. Market volatility isn't a bug in the system, it's how you get the reward for holding through times like this. This is a test of how well we are able to stick to our plan. We've built diversified portfolios to buffer against market declines, but even well diversified strategies are feeling the pain over the last several weeks. Just like during COVID, no one has a playbook they can point to and see exactly how this will play out. There hasn't yet been a time where a strategy of buy-and-hold, rebalance, and keep buying the dip hasn't worked out for long-term investors. If you miss the best days in the market, you tend to underperform, and the best days always happen after moves like this.
If this volatility doesn't bother you in the slightest, you might have the iron will of an AI-powered android. If it's keeping you up at night or got you second guessing your financial plans, please reach out and we'll get together with you to discuss.
What We're Reading
- Trump Just Shredded the Economic Playbook. Here Are Your Next Investing Moves. - Jason Zweig
- The Coyote Next Door - bioGraphic
Have a great weekend.
Dogwood Wealth Management