Think big

And his second rule, “Maximize your options.” This is the most optimistic way to make sense of his historic Executive Order. I traveled this week to Colorado Springs and California, there visiting Sacramento and the San Francisco area. Some of the most notable comments from California investors: “Trump’s going to take away my Social Security” and “I’m not jumping out the window yet.” Discussing penguins at a spirited dinner near San Francisco, an advisor says the whole point is to “make them submit.” The reciprocal tariffs surprised the market, along with the unorthodox calculation and inclusion of VAT taxes and the exclusion of Canada and Mexico for items that fall within the USMCA. As of Thursday, advisors in San Francisco are receiving “more buy than sell calls.” On Friday, Wolfe Research noted that “real fear is here,” with the VIX spiking to 45, now pricing in a recession. Thursday and Friday combined for the 19th-worst pair of back-to-back days in the history of the S&P 500. Friday was the single-highest volume day in US stock market history. A 50% retracement of the S&P 500 bull market is roughly 4,820, with 4,500 being a recessionary floor (61.8% retracement). ISI’s stoic comfort: “the year’s highs likely aren’t in, but the lows may not be either.” Jeffries thinks in a month’s time equities and rates will be higher. But “sadly, a month is way too long a time in financial markets.”

Policy uncertainty is not our only problem. PMI data for March showed a softening manufacturing sector, with hiring slowing down and tariff uncertainty likely to blame. This is particularly disappointing since manufacturing had only lately started to expand. Economic growth looks to be suddenly in retreat. The Atlanta Fed’s GDPNow has growth at a -0.8% annual rate of in Q1, adjusted for gold shipments. The slowdown had not been priced into earnings, causing expectations to decline rapidly from 10.4% to 5.9%. Some of the fitfulness in the economy has to do with pulling demand forward in advance of tariffs. Inflation has continued to be sticky, and the tariffs should increase inflation while decreasing demand—in other words, an already stagflationary dynamic just got more so. Thomas Barkin, the president of the Richmond Fed, warned that tariffs could create a “cage match” between consumers who balk at paying more and sellers who refuse to eat the tariff expense. The labor market has been good, but that could easily change. At least the Fed has plenty of ammunition.

So, now what? Wall Street is busy calculating the new effective tariff rate, with so much horse-trading still to come. On the low end, Goldman Sachs says a 17% effective tariff rate versus the Yale budget lab’s figure of 23% and initial calculations of 29%. While Piper Sandler rejects as fanciful the notion that Trump looks to negotiate these tariffs down, the President has already shown a willingness to make deals. As Fundstrat said, “with terms so absurd, probabilities favor negotiations.” Importantly, exemptions for items like semiconductors, energy and essential minerals, and pharmaceuticals show an administration that draws distinctions. Canada, Mexico, and Brazil fared relatively well in the announcement, while Asian countries such as China, Vietnam, and Malaysia were hit with heavier tariffs. In theory, tariff-related inflation should not be enduring. Three factors may offer an exit from the tariff gloom: incrementally better trade news as parts of the tariffs get negotiated away, the current soft patch leading to Fed cuts (June?), and, finally, the administration and Congress turning to tax cuts. Retaliation risks have already come into play, as China quickly put forth 34% tariffs. But Yardeni suggests that, from a global perspective, the US glass is still half full: “Despite the US’s worrisome federal debt dynamics, China’s current bout of deleveraging is so extreme that it may take years (if not decades) to fully clean out. We think the US would outperform the rest of the world in the event of a tariff-induced recession.” All of this as Q1 earnings season is about to begin. Earnings calls are likely to be filled with more caveats than ever about the future now. My favorite comments of the week were from an advisor, “I’m excited for the future,” and a retired investor—when I mentioned that investors are wondering what to do, she stoically said, “nothing.” Now, after a week I’m returning to the Mister. He’s likely to point out how well Bitcoin has held up. In the first five minutes, I bet…

Positives

• Solid labor market going into tariffs March payrolls surged +228k (well above the +140k consensus), even as prior months were revised down by a net -48k. Private employment also surprised to the upside, gaining +209k vs. the +135k forecast. The robust payrolls number was underpinned by across-the-board strength. The unemployment rate is creeping up, but labor force participation increased.
• Homebuyers will love lower rates, as long as they keep their jobs. Mortgage applications for purchase rose 1.5%, the fifth consecutive weekly increase, up 8.6% against last year. Further, it is reasonable to conclude that home prices are cooling off as inventories rise. In March, unit auto sales surged to a 17.8 million unit annual rate, the highest since April 2021, as buyers are taking Trump's auto tariffs seriously.
• Construction spending jumped 0.7% m/m in February, well above expectations (consensus +0.3% m /m). The February data highlight gains in residential spending (+1.3% m/m). Single​-​family construction spending rose for a sixth-straight month, after decreasing in the prior five. Private residential improvement spending remains well above the pre​-​pandemic trend and has helped prop up the overall level of private construction spending. Meanwhile, factory orders rose 0.6% in February, in line with consensus expectations.

Negatives

• Other labor market data might make one queasy Concerning is that the prime-age (25 to 54) employment rate has declined for four of the last six months and fallen 0.5% over this period. It is rare to see prime-age employment declining this much over a six-month period outside of a recession. Furthermore, the March Challenger report continued to surge for a second month in a row, reaching a higher level than during the recessions in 2001 and 2008. Almost all of the announced layoffs have been by the government. Elsewhere, the JOLTS data remains consistent with the low hiring, low firing equilibrium the economy has been in for years now. Indeed.com Washington DC job postings currently stand 11% lower than at the beginning of the year.
• Services weakening in advance of you know what ISM’s services PMI fell -2.7% in Mar, to 50.8% (consensus: -0.6%, to 52.9%). However, the employment index sank to its lowest level since June 2024. Respondents highlighted that the uncertainty around tariffs has had “a strong effect on [their] purchasing decisions this month.” Even though the trade war is occurring in the goods-producing sector, the knock-on effects are likely to hit the much larger services-providing sector of the economy. The S&P Global services PMI, not a composite but rather a business activity index, rose 3.4 points from February to 54.4 in the final March reading.
• Manufacturing weakening in advance of you know what The ISM manufacturing composite slid 1.3 points in March, to 49.0, with weakening in almost all major components, partially offset by a temporary boost from precautionary stock building. The reading was somewhat softer than expectations (consensus 49.5), but the details paint a considerably worse picture, with new orders, production, and employment now all below 50 after having briefly surged above it during the January inauguration month. The effects on the composite from these declines were partially offset by a jump in the inventories component to its highest reading since the post​-​pandemic. Indeed, while China’s Manufacturing PMI improved 0.4 points to 51.2, the highest since November, most other countries stood in contraction territory. The last time we saw a trade-war, manufacturing started from a much stronger base with much stronger momentum than it is now. There’s less of an economic buffer this time around.

What Else

High stakes Before the reciprocal tariffs were announced, various think tanks and Fed researchers worked up how this or that program against imports from this or that country would affect growth in the US and the country involved. In every case, the hit to the country involved was far more negative than the hit to the US, although the US did get hit too.  However, if the US tariffs almost everybody, and almost everybody reacts by retaliating against the US while liberalizing trade amongst themselves, then the economic damage from this is concentrated in the United States.

Place your bets Corrections normally last 115 days versus 40 days so far and only 20% of corrections typically turn into a bear market. Bear markets almost always require recessions. UBS doesn’t see the preconditions for a sustained recession "but we may get close to a technical recession in the in unlikely scenario that the April 2nd announcements are not moderated.”

Stagflation risks are rising Historically, UBS found that the S&P 500 outperformed its regional counterparts when growth was sluggish. Industries that outperformed through stagflationary pressures were Energy, Health Care, Food Staples, and Software.