Why So Complacent...
May 10, 2025
I went into the local hardware store earlier this week to buy a metal bracket to hang a garden hose. While waiting in line, I turned the bracket over to check the price. Instead, what I found was familiar - a ‘Made in China’ label. No tariff problem for me. Then I went back to work – much more pleasant lately. Markets had rebounded from recent steep declines…the trade war and a potential recession clearly not an investor concern. Life appears to be carrying on…for the moment, anyway.
When will the murky fog of trade policy unpredictability and inconsistency lift? Who knows. How it will ultimately play out? It is anybody’s guess. Direct impact on prices and the secondary effects (e.g. fewer tourist dollars) are still unknown and largely unfelt. The administration has factions – tariff hawks vs. tariffs as negotiating leverage - competing for Trump’s attention. Leaks and tweets abound.
Yet investors appear to be so complacent. Stocks prices have rallied above where they were prior to the April 2 ‘liberation day’ tariff announcement. Investor sentiment, while still bearish, noticeably improved. Investor funds came back off the sidelines. Tesla and Bitcoin rose almost 10% each…in the past 3 days. Does anyone really think the worst is over? Really?
True, there was another strong employment report – of course, that is backward looking. Inflation seems relatively under control – of course, that is prior to any meaningful tariff impact. The economy seems strong – of course, that includes the (not easily measured) impact of any ‘pull forward’ of activity by consumers and businesses trying to front run the tariffs.
What am I missing? Even if the end result of the trade war is just a 10% tariff on all goods, that is, on average, a 400% increase. And 10% is the minimum. Does anyone really believe that is all that will remain of this trade war? The UK trade deal generated so much attention. It was the first deal and it wasn’t even that. Just the ‘framework’ of a trade deal. With our 6th largest trading partner. So, we are in the clear? Time is running on the 90-day ‘pause’ with not a single trade deal finalized. What happens on July 9th when the pause is unpaused? Reciprocal tariffs go into effect against friend and foe alike? Exactly what will that mean and how will it play out?
The public has yet to feel any real consistent impact from the Trump administration’s tariffs, much less from the growing trade war. Market activity gives the impression that investors are not that concerned. Is it being assumed that there will be another pause, that the Trump administration will ‘blink’ in the face of increasingly empty store shelves and rising prices? That’s a pretty risky bet. President Trump today allowed as how 145% was probably too high a tariff on Chinese imports, that 80% was more likely the correct amount. Does anyone think that a tariff of ‘only’ 80% on Chinese goods won’t have much of an impact?
The mildly optimistic, hardly worried outlook extends to market pundits and analysts too. Most see a rally in the second half of the year, presumably based on the assumption that there will be a resolution to all these trade tensions. But let’s consider an alternative scenario. Neither Xi Jinping nor Donald Trump are lacking in ego or a willingness to demonstrate their power. A long drawn-out resolution to the power stalemate unfolds. In the meantime, businesses remain tentative about new investments due to the uncertainty, the consumer is gob smacked by the lack of products on the shelves, the economy contracts, unemployment rises.
The above scenario is not inevitable or even likely. It is, however, certainly a possibility. Given that, I am surprised by the recent market strength. I believe it is likely that this recent market rise is near an end. The market may hold here, might even rally meaningfully in the second half of the year as many are predicting – I am not convinced…at all. Momentum and sentiment can change very quickly. All the uncertainty makes for a much riskier investment environment. It would be prudent for investors, and advisors, to exercise more caution. Chasing momentum plays will be riskier, owning stocks with high multiples and extended valuations will be more precarious.
No need to get impatient or entertain FOMO…cash on the sidelines still earns nearly 4%. I will be very surprised if there isn’t an opportunity to buy into the market at lower prices and better valuations. This is not to suggest getting out of the market…long term investments in well managed, profitable companies will stand the test of time. Caution putting additional capital to work is advised. Be patient and wise, not impulsive and foolish.
I am attaching a link to a recent column by David Brooks in the NY Times. It is an interesting analysis of Trump’s strength and the limited success Democrats have had countering all his energy. Whether you like Trump or not, his success in controlling the narrative is phenomenal and a phenomenon. Understanding it better (and to this end I also strongly recommend the Ezra Klein interview with Chris Hayes on attention) is useful.