In the seafaring days of old, the sextant guided mariners through uncertain waters, its precision bringing order to the vagaries of ocean navigation. Sailors had relied upon measuring angles between stars and the horizon to steer the oceans quite accurately. Today’s financial helmsmen find themselves similarly reliant upon instruments of measurement, albeit ones of considerably greater sophistication, to chart their course through the tempestuous seas of financial market volatility—a volatility now amplified by our newly reinstalled President’s mercurial trade machinations.
The Trump administration, barely two months into its tenure, has unleashed a maelstrom of protectionist rhetoric that is beginning to rival the infamous Smoot-Hawley folly of 1930. We don’t see such a dire outcome, but this has produced the curious spectacle of American importers frantically stockpiling foreign goods before the tariff guillotine falls, simultaneously inflating import statistics and depressing GDP calculations. Thus, the Atlanta Federal Reserve’s GDP Now forecast showing a 1.8% contraction deserves to be viewed with scholarly skepticism rather than panic. Consumption and business activity are not contracting and the import surge will quickly reverse over the next couple of months, pushing GDP estimates back into positive territory in Q2. Consumers continue to increase spending and future capital investments are exploding. Any slowdown due to the great trade reset should prove ephemeral.
Small business owners were major supporters of Trump. While many voters and CEO’s supported tariffs, the non-specific trade barriers Trump has imposed upon all of our trading partners with the threat of never ending retaliations has many worried about economic growth. Carried to the extreme, American prosperity faces an existential threat largely of its own government’s creation. Small business optimism, which surged upon Trump’s electoral victory, has since retreated in the face of presidential pronouncements that economic pain must precede the promised golden age. CEOs and consumers alike now find themselves in the uncomfortable position of spectators at a high-stakes poker game where the rules change with presidential whim.
Trade policy uncertainty in the modern era has reached new heights and has understandably restrained US investors unwilling to buy during this mini geopolitical panic. There is no evidence yet of an approaching recession today or that isolationist beggar thy neighbor barriers will trigger a depression, but there is likely an expiration date this year on Trump’s effort to cement a new international trade equilibrium.
Other than the singular global focus on Covid in 2020, there has never been so much economic uncertainty about the future as there is today during Trump’s first two months in office. Uncertainty is a powerful force over human emotions and often leads to panic, which is always followed by opportunity.
It looks like the leisure travel boom just hit the pause button. While the Cruise Line future bookings are currently running at record levels, they may be lagging very recent concerns among travelers about inflation and their pocketbook resulting from tariff turmoil.
History, that most reliable of counselors, suggests that periods of maximum uncertainty are invariably followed by clarity. The programmatic trading collapse of 1987, the mortgage meltdown of 2008, and the pandemic paralysis of 2020 all presented astute investors with opportunities for substantial gains. The Federal Reserve, having reduced its monetary draining operations by 80% today, stands vigilant, prepared to cut interest rates at the first indication that presidential trade pugilism is damaging economic fundamentals
Meanwhile, European and Chinese authorities, envious of American economic vitality, have initiated stimulus programs of their own, producing a rare instance of foreign market outperformance since December. Technical indicators suggest markets are oversold, with models predicting higher S&P 500 values in the coming months. Investment dolars are sloshing around the globe looking to capitalize once the tidal trade tiff recedes.
The equity market Bull case is more of a timing issue. Markets are oversold and history reveals to us that the various models have an excellent track record indicating that the SP 500 Index should be higher over the next few months. The difficult to answer question is how long will trade wars continue? The economy and investment markets will adjust positively to a calmer resolution in a few months. However, a year long escalation of rising trade barriers will eventually hurt the economy as CEO’s and consumers sit on their hands awaiting clarity.
Our recent forecasts have provided some navigation of these uncertain waters to this point. On February 14th, two days before the 2025 record high in stocks, we said “this excess Call option sentiment normally correlates with a market top“. Then the day after the top that led to a 10% SP correction, our update mentioned “there is risk of a downside scare. With our 20% cash exposure we will wait for … SP 500 Index decline of 6 to 10+%. Downside risk should wane before the end of March.” On February 28th we said ” for the next few weeks and possibly the next few months, we would not expect enough trade policy clarity to allow a run back to record high stock valuations.” And finally our most recent prognosticastion of note on March 10th was that the ” SP 500 Index in the 5500’s has been a major target for strong short-term support at 10 to 11% off record highs.” As it turns out, the SP bottomed out at 5504 three days later.
The prudent navigator of these financial waters might consider the cash S&P’s recent bottoming at 5504—precisely at our 10% support target—as a signal to judiciously deploy capital held in reserve. While further volatility cannot be dismissed given the administration’s apparent willingness to sacrifice short-term market performance on the altar of trade policy, the skilled investor recognizes that excessive fear typically presages opportunity. The seasonal pattern through April, despite continued tariff uncertainty, looks favorable.
In the eternal struggle between panic and patience, history favors the latter. When the dust of trade tumult finally settles, economic fundamentals will reassert themselves, and the discerning investor who maintained composure amid the tempest shall find their fortunes restored.
