They wanted cheaper eggs. And lower mortgage rates. And maybe even lower taxes.
They didn't expect a self-induced global recession as the path to get there, but that's where we're increasingly headed.
With the Trump Administration’s imposition of sweeping tariffs on products from nearly every country, "The risk of recession in the global economy this year is raised to 60%, up from 40% earlier." Those were words from J.P. Morgan's economics team in their note titled "There Will Be Blood."
The Morgan team further explained, "At a basic level, a tariff is a tax increase on U.S. household and business purchase of imported goods," and, "A hike of this size would be on par with the largest tax hike since WWII."
This is unequivocally a drag on growth at a time when consumer and business confidence were already lagging. I have always said that one can induce a recession by simply getting enough people to delay making purchases by a few months. Uncertainty can make that outcome a reality.
With the news of more severe tariffs than expected, stocks slumped. The S&P 500 dropped nearly 5%, the Dow lost about 4%, and the Nasdaq composite plunged 6%. Energy was the worst performing sector, reflecting expectations of lower demand in a weaker global economy. The yield on the 10-year US Treasury Note fell below 4% in another sign of lower demand for money in a weaker economy and a flight to safety by investors.
There is no disagreement among pundits about the impact of a global trade war. This doesn't just throw sand in the gears of global commerce. Is throws cement over it. They do disagree, however, about the policy response from the Fed. UBS wrote to their clients that the Fed will cut rates four times this year while Morgan Stanley’s chief economist worried that the Fed will have trouble ignoring the inflationary impact of the tariffs and will be hesitant to cut.
The fall in Treasury yields lines up with the UBS view, but one can see how the Fed may hesitate before rescuing the economy with lower rates. They may be concerned about the inflationary effects of the higher price of imported goods, especially where there is no domestic substitute. (Where is that domestic cell phone factory, anyway?)
Of course, tariffs aren't a one way street, and China has already added an additional 34% tariff on US goods. Expect the same from other nations. This is entirely predictable and understandable. At some point, negotiations bring some semblance of logic and common sense. When that will happen is anyone's guess.
Three months ago, the US was at full employment, inflation was headed toward two percent, and Americans were looking forward to another robust year of growth, with hopefully lower inflation and a decent job market.
This has been replaced with the highest level of uncertainty since the Great Recession.
It's quaint that just a month ago we reduced stock market exposure, thinking that stocks were overpriced at a time when uncertainty was increasing. Today, it seems underwhelming to have only modestly rebalanced away from US stocks towards other assets. But here we are.
With stocks having suffered a negative return in the first quarter, and yesterday posting worst loss in five years, one has to wonder if being a contrarian might soon make sense again. Surely the dust has yet to settle. But excessive optimism has been replaced with rampant pessimism – historically, a better place from which to build a portfolio.
We're not quite there yet of course. More weakness is baked into market futures today. But we are reminded that companies have previously navigated wars, a banking system collapses, double digit inflation, tariffs, a pandemic, and worse. Most US firms are very well capitalized with exceptionally strong balance sheets after years of prosperity. They will weather this. But while they will very likely survive, their shares may slump owing to a less rosy future.
I'm also reminded that a policy decision is but one point in time. It can be reversed, albeit perhaps after some damage is done. Those policies may undermine corporate fundamentals, but betting against American companies has usually been a bad wager to make. Investment opportunities often come from times such as these. At some point, one has to step into the cloud, even though it's unclear what hides inside it.
Yes, this feels like a massive unforced error. It seems that years of global cooperation has been squandered, supply chains decimated, and investments rendered far less valuable. But these too can be repaired over time. Enterprising managers are rolling up their sleeves to make sense of this new environment.
I don't envy the hard work they have in front of them. But for investors, diversification and a long-term view are still the best tools for an uncertain environment. (And at least we have cheaper eggs.)