The Tariff Tempest: Sentiment Storms in the Market
Last week, the Trump administration rolled out a global tariff policy. The policy, based on trade deficits, is much more significant than most people anticipated.
Tariffs, by themselves, slow the supply chain and act as a tax on imported goods. The size and scope of the tariffs announced last week was unexpected and threw the markets into a tailspin with the S&P 500 losing 10.5% over two days.
As we have noted before, the market is controlled by two main factors – sentiment and earnings. Sentiment is how investors feel about the market and what they project earnings to do in the future. Earnings are the actual profits of publicly traded companies. While sentiment controls the market over short time frames, earnings move the markets over longer periods.
The recent route in the market has been sentiment based – investors projecting that companies and the economy will fare poorly given the current tariff policy. It will take some time to see how the economic policy plays out in corporate earnings and there is still significant uncertainty as to:
· How negotiations will affect tariffs
· How income tax policies might be adjusted
· How much investment the government may make in US manufacturing
· How interest rates will adjust given new economic conditions.
Clearly – a lot can still happen in the coming months.
The suddenness of the decline reminds us of the market movement in March of 2020, when the stock market fell due to government policies and stay at home orders during Covid. Over that time frame the S&P 500 fell 30% and we shifted our portfolios to be positioned more aggressively despite a very uncertain economic future.
Despite the stay-at-home orders staying in effect, the market rallied and closed up over 18% for the year. It’s a reminder that sentiment can shift quickly and market declines, especially those causes by government policies, are often quickly reversed.
We expect the news cycle is going to perpetuate fear and detail the daily shifts in policy and negotiation. On Monday, the CCN “Fear and Greed Index” registered a 4 on a scale of 100 (extreme fear). There is obviously a great deal of fear in the markets. As Warren Buffet’s mantra goes – be greedy when others are fearful and be fearful when others are greedy.
The fear is understandable. Trade policies such as these haven’t been tested in the modern economic era and on Monday the market hit a bear market, declining 20% from its prior peak. While unsettling, bear markets are not uncommon. Below is a quick look at how long the market has stayed in a bear market over recent time frames:
· 2008: 27 months
· 2018: 2 days
· 2020: 1 month
· 2022: 5 months
While there is no certainty as to how long (or deep) the market might be down, with a little patience, making new investments, or holding on to current investments, throughout this timeframe may be wise.
We will continue to monitor US economic policy as well as the effects on the economy and markets, making tactical portfolio changes when the opportunity presents itself. If you have any questions about your investments or would like to speak with your advisor, please do not hesitate to reach out.
The information given herein is taken from sources that IFP Advisors, LLC, dba Independent Financial Partners (IFP), IFP Securities, LLC, dba Independent Financial Partners (IFP), and its advisors believe to be reliable, but is not guaranteed by us as to accuracy or completeness. This is for information purposes only and in no event should be construed as an offer to sell or solicitation or an offer to buy any securities or products. Please consult your tax and/or legal advisor before implementing any tax and/or legal related strategies mentioned in this publication as IFP does not provide tax and/or legal advice. Opinions expressed are subject to change without notice and do not take into account the particular investment objectives, financial situation, or needs of individual investors. This report may not be reproduced, distributed, or published by any person for any purpose without IFP's express prior written consent.