Below are the economic and market highlights for the week:
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The Trump administration shook global markets on Thursday as it introduced a new tariff strategy affecting over 180 countries. Effective April 2nd, a universal 10% tariff would be applied on all imports. Additional “reciprocal tariffs” targeting approximately 60 countries deemed the “worst offenders” in trade practices will begin on April 9, 2025 based on perceived trade barriers like tariffs, currency manipulation, and subsidies. While most of the U.S. trading partners have elected to hold their fire, hoping to negotiate better terms, China announced their own retaliatory tariffs of 34% on U.S. goods on Friday. The announcement exacerbated selling across all markets on concerns that a global trade war will now be virtually unavoidable.
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Markets have moved sharply on the tariff announcements with the domestically focused Russell 2000 small-cap index entering bear market (down more than 20% from its record high) territory on Thursday. The tech heavy Nasdaq Composite joined the Russell 2000 index in bear market on Friday. Meanwhile, the Dow and S&P 500 are down -11.7% and -13.8%, respectively from their peaks. On the bond side, U.S. treasuries have seen strong demand on a flight to safety among investors amid the economic uncertainty. The 10-year US Treasury yield closed Friday’s trading session at 4.00%. That is down sharply from January’s high of 4.80%.
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Nonfarm payrolls soared in March, up 228K. That topped analysts’ estimates of 140K and February’s revised 117K. Meanwhile, the unemployment rate rose to 4.2%, slightly above the forecast of 4.10% due to an increase in the labor force participation. Wage growth remained healthy, up 0.30% month-to-month, bringing the annual increase to 3.8%, the lowest since July 2024. Despite the positive job numbers, the figures predate the most recent escalation in the trade war, making any observations over the strength of the labor market tenuous at best.
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Business ground to a near halt in March for both the manufacturing and services sectors. The ISM Services PMI fell to 50.8 from 53.5 in February, marking the slowest expansion since June 2024. Numbers above 50 indicate expansion while those below signal contraction. New orders and inventories slowed while employment contracted sharply. On the manufacturing side, the ISM Manufacturing PMI contracted to 49%. That was the first contraction in three months. New orders, backlog of orders, and employment contracted while production also declined. A further slowdown looks likely as companies shelve plans for the time being amid tariff uncertainty.
Markets Search for Solid Ground
The hits just seemed to keep on coming this week. After weeks of concern over rising inflationary signals and a weakening consumer, Trump punched markets in the face with the severity of his tariff plan on Wednesday. The news rocked markets on Thursday with the Dow Jones Industrial Average plummeting 1,679 points, which was followed by another 2,231 points drop on Friday on the back of China announcing its own retaliatory measures. The sell-off essentially wipes out all gains in the Dow since early June of last year. Investors dismissed the strong nonfarm payrolls since tariffs are anticipated to contribute to a slowdown which is expected to ripple into the labor market. JPMorgan raised their estimates for the likelihood of the U.S. entering a recession to 60% this year due to the trade war (up from 40%). Given the risk of a slowdown, markets had hoped they would get some accommodative statements from Fed Chair Jerome Powell during a speech before business journalists on Friday in Arlington, Virginia. Powell emphasized the central bank’s “obligation to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem.” Despite the tariffs being larger than anticipated, Powell reiterated the Fed is well positioned to wait for further clarity before considering policy adjustments. Investors had hoped that the Fed would begin another round of interest rate cuts in May and had upped their odds of up to four cuts this year, but the Fed continues to take a wait-and-see approach. With Powell having ruled out help from the Fed in the near-term, investors were left with only tariffs to contemplate.
We concede that this week was unnerving, and it would be insincere to suggest that even with the market having fallen close to -10% this week alone and it being -16% from its previous high that the worst is now behind us. Have we hit bottom? Probably not, but what we can say with 100% certainly is that we’re definitely closer to a bottom. Perhaps that is an ill-timed attempt at humor, but after a week like this past one we needed to chuckle – if only to ourselves. The thing we always come back to during difficult periods and during previous market crises (Dot.com, 2008, Greek Debt Crisis, Taper Tantrum, COVID, December 2022) is that no analyst, no economist, no Fed chairman – no one – knows where the bottom is either. That might sound particularly worrisome for your portfolio manager to say that. Think about it, though. To know where a bottom is would require knowing how the tariffs will weigh on fundamentals. You’d need to know the impact on pricing across 180 countries for hundreds of thousands of SKUs. You’d need to know the demand impact, the substitution effect and exchange rates. Then, to top it off, once you’ve aggregated all that back to earnings and the constituency of the companies in various markets, you’d need to know the multiple investors will be willing to pay – because that too fluctuates based on interest rates, inflation, perceived risk, etc. The point is when you see these huge moves in the market on macro shocks, they are not reflective of a better understanding or processing of the resulting fundamentals. They are a reaction to the direction of fundamentals looking forward. In that respect, this week’s sell-off is probably correct in its prediction, but it is important to understand that the momentum is fueled by uncertainty and fear – which almost always overshoots the true reality. To be fair, we’ve not seen the type of capitulation that would tell us that valuations are such a screaming buy that you can back the truck up, but it has declined enough for us to say that investors should batten down the hatches, be prepared to ride it out and maybe think about getting more aggressive. Yesterday, we shared several studies that support that conclusion, and it goes double following today. The biggest impairment to long term investing success is trying to time the market and switching strategies in the midst of a sell-off. Keep the faith. Cooler heads will ultimately prevail.
The Week Ahead
Key reports include CPI, PPI, and Consumer Sentiment.