Waiting and seeing

My travel this week reminded me of why I love my job! In Phoenix with a forever-favorite colleague (who confidently predicts S&P 6,000 by the 4th of July) and his cerebral yet boisterous clients, we spoke of dangerous bobcats and javelinas (wild hogs) who come down from Camelback Mountain and must be dealt with harshly—then praise for the 2nd amendment, “actually 2A.” One veteran advisor is “so bullish, I can’t sleep at night!” Others report lots of worried client emails along with calls to “sell everything;” these clients “are all anti-Trump and fit to be tied!” A UK-born advisor asked me what “Pumpkin Head” will do next, marveling that he “actually read” The Art of the Deal. In conversation around AI and lost jobs, another advisor suggested that “every robot will pay into Social Security,” which evolved into Elon’s stock and how meaningless P/E ratios are. “One study finds that they are highly correlated with NYC rainfall.” Uh huh … Equities are in “show me” mode, as gold is frothy (99th percentile above long-term trend), and demand for Treasury bill ETFs is strong. Even the defensive sectors have seen outflows. And there’s evidence investors are moving out of US assets into other regions. Is the worst over? The S&P has now made up half of its losses from the February highs. Over three days this week, the Nasdaq jumped 7.9%. Since 2000, there have been 44 times this index has risen 7.5% or more while remaining below its 50-day moving average. One month after rising 7.5%, the average return was -1.4% and three months out -3.7%, so … Downward earnings revisions are nearing recessionary levels; nine of the 11 sectors had downward revisions this month, and multiples are down 2.5 points year-to-date.

So far, the White House has been backpedaling when it hits resistance to tariffs, but stabilization may prompt it to push again. Unless the White House changes its goals, we are likely stuck in a range. FedEx says that about 90% of small businesses rely on imported goods. For such businesses, the tariffs will outweigh any benefits from Fed cuts. The question whether the White House could replace Jerome Powell is before the Supreme Court as we speak. Trump said recently that he has “no intention of firing Powell” and that he “never did.” Still, that decision from the high court will be very important to investors. China has $765 billion of its official reserves in US Treasurys and the country as a whole owns nearly $3.5 trillion. It (along with Russia) sold Treasurys in 2022 due to the Ukraine invasion. For now, it seems that China is holding its US government debt amid the tariff standoff. And although financial conditions have stabilized, long-term real yields are high for a weaker growth outlook. Earnings call guidance reveals that companies are postponing decisions, awaiting more certainty about the policy landscape. Goldman Sachs looked at prior recessions for which a key catalyst existed, such as the oil shocks of the 1970s. They found that hard data takes about four months to weaken, with the most reliable indicators being initial jobless claims, the unemployment rate and the Philly Fed and ISM services indexes. The unemployment rate and job-finding probability weaken two or three months after a sudden catalyst but provide a more reliable indication than unemployment claims. Wait and see. 

Treasury Secretary Bessent acknowledged to an investor audience that the China standoff is unsustainable and will need to be de-escalated. For its part, China stated that it would retaliate against any countries that signed trade deals with the US “at the expense of China’s interests.” Trump’s hostility to Powell might prove to be, well, transitory. He complained in 2018-19 when Powell kept rates high but then changed his tune once the Fed cut rates. Barclays expects a mild recession in the second half of the year, while Strategas sees the economy as late cycle and notes that Powell faces pressure to ease from the short end of the bond market itself (not just from the president). Fed Governor Waller said that the economy can handle tariffs in the 10-12% range. Interestingly, the administration hasn’t spoken lately in terms of “reciprocal” or “optimal” tariffs. The Art of the Deal! Trump’s backpedaling may have helped firm up the stock market, as we now have a higher low above support, which, ISI observes, has been a feature of all the bottoms since the Global Financial Crisis (in 2011, 2016, 2018, 2020 and 2022). Ed Yardeni notes that the last four covers of The Economist have all been very bearish, prompting the contrarian in him to see improving opportunities. The Trump administration is said to be in talks with 15 countries about tariff agreements and another 75 have expressed interest in such discussions. We may see market-friendly policies and proposals in the weeks ahead, but until we see actual deals with US allies, it’s hard to know how durable any given policy pronouncement will be. Meanwhile, there’s business to attend to. On May 22, Trump and the 220 largest holders of his meme coin are due to have dinner, where he will talk about the future of crypto.

Positives

• Tariff revenues has a better ring to it April tax season revenues continue to come in stronger than expected, with year-to-date (through April 18) non-withheld individual and corporate tax payments up 12.3% y/y, some welcome breathing room to improve the deficit outlook for fiscal year 2024-25. Treasury collected $11.7 billion of April tariff revenue, a sharp increase from last year’s $4.9 billion, even as the full suite of tariffs has yet to take effect. Strategas notes the fiscal impact of tariffs is underappreciated, providing an important source of revenue with deficits still near 7% of GDP. Both sources of revenue delay the X-date by which the debt ceiling needs to be raised, giving Congress more time to reach an agreement. Tariff revenues are also politically important for Republicans, who view them as a key offset to their expansionary fiscal package.
• Manufacturers keep manufacturing The S&P Global manufacturing PMI rose 0.5 points to 50.7 in April versus consensus expectations for a moderation to 49.0. New orders improved 0.3 points to 49.7 and outputs rose 1.6 points to 50.2, while the employment index fell 0.2 points to 49.7. The input price index rose 0.9 points to 66.9 and the output price index moved up 2.0 points to 60.8.
• Consumers keep spending … OpenTable data shows seated dining is still strong. TSA crossings paint a similar picture. 22V Research notes that service demand—a good proxy for tariff knock-on effects—hasn’t yet been affected. But the Philadelphia Fed reported that the share of US credit card borrowers making only their minimum required payment hit a new 12-year high at the end of 2024.

Negatives

• … But still not on homes Existing home sales fell 5.9% m/m to 4.02 million units in March, below forecasts (4.13 million). March new home sales were a bright spot, climbing 7.4% to 724k units (consensus 685k) aided by the decline in house prices (-10% since Oct 2022). However, with inventories grinding higher amid rising input costs due to tariffs, the outlook for new home construction looks gloomy. Indeed, the March Architecture Billings Index fell to a weak 44.1%, with Architecture Inquiries (which tend to lead billings) down to a cycle low. Moreover, over the last three months, single-family homes sold but not started slid to a fresh low. And builders are cutting prices to move product; median sale prices fell 7.5% over the last 12 months.
• Tariff angst Headline durable goods orders posted a strong 9.2% m/m gain in March, reflecting a 139.0% m/m surge in aircraft orders, well surpassing expectations (2.0% m/m). New orders for nondefense capital goods rose 29.4% m/m, but orders in the core component—which excludes aircraft—inched up 0.1% m/m, matching consensus (0.1% m/m). Core capital goods shipments—which tend to lag orders by a few months—slowed to 0.3% m/m in March. But UBS suspects this could be the calm before the storm, noting the durable goods report is one hard data series where we should see most clearly the impact on business confidence, uncertainty and the impact of trade actions. Elsewhere, the Federal Reserve Beige Book reported economic activity “little changed,” with tariff-related uncertainty characterized as “pervasive.” “Most districts” saw “moderate to robust” sales of vehicles, attributed to front-running ahead of tariff-related price hikes. Several districts reported a “considerably” worsened economic outlook and labor market conditions saw a “slight deterioration,” as firms take a “wait-and-see” approach. Businesses across the nation conveyed that they expect to pass through additional costs to consumers, as many firms have already received cost increase notices from suppliers.
• Slowing ahead of tariffs The S&P Global Services PMI fell 3 points to 51.4, worse than consensus (52.6) had expected. As well, the Philadelphia Fed nonmanufacturing business general activity index fell to -42.7 in April from a prior -32.5. Services activity declined to -30 in April; expectations fell to their worst (ex-Covid) reading ever (data back to 2011). Too, headline Richmond Fed Manufacturing fell a more-than-expected -13 from -4 in March. In ISM-adjusted terms the series moved to 48, joining the Empire & Philly regional Fed ISM-adjusted PMIs below 50%. Price expectations popped to a record high (data back to 2011).

What Else

What even is a recession?? In 2020, the Covid pandemic rattled markets and led to a very brief (two month) National Bureau of Economic Research (NBER) recession, but we haven’t seen a classic economic recession since the financial crisis. Most recessions last less than a year, and the market declines 30% on average (median decline 23.5%). On average, the NBER declares a recession 7 months after it started, and calls the end 15 months after the recession’s trough. There is no consistency over time for where the P/E multiple bottoms.

Trump’s base may not care about the stock market Deutsche reports that the US economy is about 26% of world GDP, though its market cap share was nearly double, at around 50% before Liberation Day. But while the Top 1% has 47% of their wealth in stocks, the Bottom 50% has less than 5% of their wealth in public equities, though 49% in real-estate. With mortgages in the US tied to bonds, keeping long-end rates anchored will be much more politically important than the level of stocks. This may help explain the 90-day reprieve two weeks ago.

Have you read The Art of the Deal? If so, Yardeni Research says Trump’s tariff tactics shouldn’t surprise you; they’re straight out of his book. “The real excitement is playing the game,” Trump wrote. For investors, Bloomberg says the big picture story seems to be one of constant U-turns that have unleashed the biggest stock swings in years as investors try to keep up with Trump’s back-and-forth dramas. Piper Sandler sees the large swings in sentiment like a pendulum going back and forth and notes the irony in that the top of the pendulum is called the “pivot.”