As we come to the end of the first 100 days of the Trump administration and look for clues for the remaining 1,360 days of his term, it is becoming obvious that the effort to remake world commerce by leveling tariffs on our trading partners has been less than a total success.
The idea was to return manufacturing to the country by making import competition less competitive by leveling taxes on the same. This would induce domestic manufacturers to expand with less import competition. It would also induce foreign manufacturers to set up plants in the US to avoid the import levies.
The problem is that, so far at least, little is going according to plan. The stock market is down since April 2, “Liberation Day”, as is the bond market. This decline in bond prices had the effect of causing interest rates to go up. The value of the US dollar against foreign currencies has also declined, requiring more dollars to purchase the same quantity of foreign exchange. The economy is being held up by panic buying to beat the tariffs. Things that can be acquired like goods are in strong demand. Services like air travel are showing signs of a recession.
Consumer sentiment is declining rapidly, affecting the sale of homes and autos. Companies are delaying expansion plans given the uncertainty in domestic demand. It would appear that economic activity is in danger of freezing up. As the stock market declined this month, the administration at first preached the virtues of staying on the course. That resolve began to wane when the bond market began to weaken significantly. This was because the stock market is prone to fluctuation. However, rising interest rates triggered by a falling bond market could scare foreign investors off, to say nothing of blowing a hole in the federal budget. As bonds mature, new bonds would need higher coupon interest rates to attract buyers. The additional interest expense would be an aggravator of yet more government red ink.
Until recently, the world operated on a trade ecosystem that had the US running a deficit in trade with other countries. Those same countries bought US government debt with their trade surpluses, as well as having their investors buying stocks and property such as US real estate. The effect of this was to keep our inflation down as foreigners made goods cheaper than Americans could. At the same time, interest rates were suppressed as foreign demand for debt kept US interest rates lower than would be otherwise. Finally, stocks and financial assets were boosted in value by foreign demand for American property. Due to such demand, the US dollar stayed strong.
Over time this scenario was not sustainable. At some point, foreigners would start buying other countries’ assets with American dollars. This would cause the dollar to weaken. Such weakness would reduce foreign returns on American assets. The only long-term solution was to have the government balance its budget so that the US is less dependent on foreign demand for its debt.
The issue with tariffs is not the need to increase government revenues but the execution. By alienating the rest of the world, we now have no one to turn to for support. It appears that the chief target for tariffs is China. By rolling back tariffs on the rest of the world but keeping them on the Chinese, it would appear that China is the major trade target.
It is also a formidable one. Each country was the other’s largest trading partner in 2024. Chinese media, controlled by the government, is quick to villainize the US. It would appear to be only a matter of time before the assets of US companies are nationalized. If trade pressure persists, China can always divert the attention of its populace by invading Tiawan.
This is not a good situation. One has to believe that, like crises in the past (2008 real estate meltdown, 2000 dot com crash, 1987 failure of portfolio insurance, etc.) a way will be found out of this. The objective is to thus find the best investments for these times that will prevail and, if not thrive, be able to persist until the crisis passes.
The Economy
Economic activity has shown a few signs of a slowdown. This is the result of the aforementioned panic buying, a reluctance of businesses to lay off workers (especially with immigration policies making replacements hard to find), and a lack of a clear sign that the economy is entering a recession.
Such a sign may come this summer as the layoffs at the federal government level begin to percolate through the data. Also, as most panic buying reflects demand being pulled from the future to the present, a falloff in consumer spending by Labor Day will likely become more manifest.
Interest Rates
The direction of the dollar as well as the willingness of foreigners to hold US-denominated assets will dictate the level of US rates going forward. Normally, an economic slowdown would result in the Federal Reserve lowering interest rates to stimulate demand. If such a rate cut results in a lack of foreign demand for US debt, or the outright sale of the same, the resulting run on the dollar would boost prices and become very inflationary. Thus, the Fed may not have the freedom of movement accorded to it in the past.
Inflation
Inflation is slated to go up under almost any scenario. Tariffs will cause prices to be appreciated. If not tariffs, a waning demand for US debt will cause interest rates to go up.
The only way out would seem to be a more balanced budget. This would require the government to raise revenues and not pass them out as tax cuts. The public’s desire seems to be moving in this direction. It would not seem that those in Congress have picked up on this trend.
The Stock Market
The stock market is being buffeted by several factors, not all of which are related to the economy. Various domestic and foreign hedge fund strategies are now dumping US dollar assets to deleverage positions which, due to the erratic nature of the American financial markets, are threatening to saddle such funds with hefty financial losses.
Then there is the fallout from the trade war. The Financial Times relayed this morning that China has told its investors to stop funding private equity funds in the US or such foreign funds holding US assets. As China has export controls over its flow of funds, this edict has the rule of law.
All of which makes it of little surprise that through April 25, the MSCI World Stock Market Index has lost 11 percent so far this year, while the same index without the US component has risen 4 percent. This 15 percent gap is the greatest since 1993.
For the near term, it would seem that stocks that pay material dividends would have an edge over stocks that do not. However, such stocks need to be analyzed to determine their ability to continue to pay dividends going forward, especially given the deteriorating economic situation.
The truth of this was displayed by a paper written by Boyar Research. It pointed out that the “Magnificent Seven” stocks (few of which pay dividends) are down by 14.8 percent year to date, (as of April 25), while the 493 other stocks that make up the Standard & Poors 500 are up by 0.4 percent. Easy come, easy go.
Warren M. Barnett, CFA
April 28, 2025
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