Many doubts about the stock market and the economy remain. As Bank of America notes, the simple reality is that there’s no tariff playbook. These are unprecedented times.
But now, it seems like a good point to step up your buying a bit more aggressively.
Some reasons why:
* Stock investors are nearing or in a state of panic. The VIX has spiked to above 42. That’s a rare level only seen during particularly troubling times like the Great Financial Crisis. So far, this crisis is not systemic but self-induced. That means potentially, at least, it can be easily reversed (uninduced).
* The Fed may soon ease by 50 basis points. Jim Paulsen of Paulsen Perspectives on Substack just took a look back at all the times we have had back-to-back ~5% declines. It has happened seven times since 1965. Each time, the Fed eased.
* Even without Fed easing, stimulatory forces are kicking in. Interest rates have declined a lot. The ten-year rate has fallen below 4%. Oil, commodity prices and the dollar have fallen sharply. A growing liquidity preference will create money supply growth. All stimulative, points out Paulsen.
* High frequency consumer spending data (weekly Bank of America credit card spending analysis) show consumer spending growth remained positive through the end of March. The consumer has not given up, at least as of March 29.
* Severe market declines around the globe are putting pressure on all governments to come to some sort of compromise on tariffs. Again, from Bank of America: “One can argue that unless the endgame of policymakers is global recession, negotiations are likely and could be positive catalysts for markets. But leadership caving to the US would be impolitic, and negotiations that can be cast as win-wins may be hard to get done quickly.”
* On the “what could go right” side of the ledger, both Paulsen and Ed Yardeni of Yardeni Research point out that many questions surround Trump’s purported authority to impose tariffs by executive order.
The upshot here is that the tariffs may soon be challenged in court. In the past several weeks, federal courts have been unfavorable to many of Trump’s executive order strategies. At the very least, a temporary restraining order against tariffs is possible, while the issue gets kicked up to higher courts or even the Supreme Court.
“In his executive order announcing the latest round of tariffs, Trump claims the power to do so under a wide range of federal laws, including the International Emergency Economic Powers Act and the Trade Act of 1974,” writes Yardeni today. “The plaintiffs are likely to ask the courts to deny that the President was justified in declaring a national emergency.”
* Yardeni also reminds us that polls showing voter displeasure with Trump policies could raise Republican and Trump concerns about losing Congress in the midterms, thus pressuring Trump to find a way out on tariffs. Already, a YouGov poll last week showed voter approval of Trump policies shifted starkly against the president.
Challenges remain
There’s still a decidedly mixed picture with a lot of cross currents. This suggest gradual buying over time makes more sense, since there could be further weakness. No one can call the bottom. I believe we are close, but there are also reasons we could see more weakness.
* Challenger layoffs just spiked. This is a bad omen for the economy, but it is a volatile series. But also, ISM manufacturing and services PMI fell earlier this week.
* Trump seems dug in on tariffs, in public comments. Negotiating tactic? Or reality. Who knows.
* Recession risk is higher now. Consumer, and capex spender confidence is being eroded by the tariff mess and the buffoonish nature of the administration.
* Fed Chair Jerome Powell said Friday the central bank won’t move on interest rates until it gets a clearer picture on the ultimate impacts. No Fed to the rescue just yet.
* Insiders are not rushing in to buy the weakness this week, even if they have turned considerably more bullish in the past two weeks, according to buy/sell ratios. Recall, however, that many insiders are currently constrained by earnings season lockdowns.
Bottom line: Mixed picture but tilting towards more aggressive buying now, given 1) the panic level among stock investors; 2) the potential for compromise to break the tariff fever considering the economic and stock market damage it is causing; and 3) the favorable odds that we do not see recession, even if the odds are shifting against us here.
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