Making Sense of the Senseless
I am surprised. I did not think that the administration would bring the China tariffs down to 30%. Equity markets are now apparently assuming that, after 90 days, the total levy on Chinese goods will fall to 10%. In short, what was the point in all of this? Even those that have supported and added intellectual justification for the high Chinese tariffs, like Bessent and Miran, spoke of the dire need to isolate China and balance global trade. Either they no longer feel the same way or this is a hiatus that will end with tariffs again going higher.
Given the impossibility of predictions, the impossibility of divining the whims of one mercurial man, let's take a look at what we do know about the current state of the economy and markets.
The 10yr is back above 4.4% and mortgage rates are around 7%. Housing prices are negative in both Texas and Florida. Completed and unsold homes are making new highs every week. We have many times enumerated the bullish secular factors that drive housing demand, but it is hard for us to see how we avoid a shallow housing recession.
The US consumer appears to be modestly slowing and there is likely to be a hangover from the pulled forward demand of Q1. Real incomes have been slowing for some time and the leading indicators of employment continue to soften.
On the positive side, measures of global liquidity like global M2, higher fiscal spending and central bank easing appear to be pushing risk asset prices higher again and that boosts the wealth and confidence of those who own risk assets.
Markets are intuitively rallying as it appears trade wars are ebbing and institutional investors find themselves wrong-footed. That said, tariffs have not gone away altogether, and they are and will be a regressive tax on working class Americans. They will also continue to disincentivize capital spending and hiring intentions.
As markets have rallied, earnings have been revised lower every week for the last four months, which means valuations have become only more stretched.
So for today, we may have relief but I'm not sure we have any more clarity.
Tim Pierotti is WealthVest’s Chief Investment Officer.
Tim has over 25 years of experience in various aspects of the equities business. Prior to joining WealthVest, Mr. Pierotti spent seven years in Equity Research management roles at Deutsche Bank and most recently at BMO where he was a Managing Director and Head of US Product Management. Tim has 11 years of investment experience most notably as Head of Consumer Research and Portfolio Manager at The Galleon Group, a former NY based $8Bln Long/Short hedge fund. Tim is a graduate of Boston College and lives in Summit NJ.
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