April was a yo-yo month for equity investors. The first week was a disaster. Trump’s Rose Garden announcement of huge tariffs on worldwide imports shocked the economic world. By the end of the first week, equities were on pace for the worst April in a century. But the administration quickly backtracked leaving room for further moderation pending discussions with the 18 largest impacted nations. Sidebar distractions, most notably the threat to fire Fed Chair Jerome Powell, quickly faded. By month’s end stocks had only lost a small percentage of their end of March values.
To those who feast on the New York Times or the cable news channels, this might seem hard to believe. Tariffs haven’t gone away. Even if negotiations lead to moderation, they are still likely to be a tax on consumers in some fashion. Consumer confidence survey results are ominous. Corporate managements don’t know how to plan. Capital spending plans are frozen.
But take a deep breath. Most Americans, especially those under 50, don’t read the New York Times or cable news channels. They understand taxes; they see the deductions with every pay stub. They know enough about tariffs to buy a car now if they need to rather than wait a few months when tariffs really arrive. But for the most part, tariffs to date aren’t affecting how they live their lives. The same holds true relative to inflation. Concerns seem overblown, at least for the moment. What matters to most Americans is that their pay rises faster than inflation giving them real income growth. On Friday we saw a jobs report that showed an April increase of 177,000. Solid. The 3-month average was only a few percentage points lower than a year ago. The unemployment rate was stable at 4.2%. So, thus far with all the ruckus surrounding Trump’s first 100 days in office, Americans still have good paying jobs and inflation so far hasn’t been a threat. Life goes on. We see that in the resilience of the American consumer. Part of the strength may be front-running pending tariffs, but for those who expected doom, it hasn’t happened yet.
However, as we all know, stocks are forward looking. We are now well past the midway point of Q1 earnings season. Results have been largely in line but within the data flow there has been substantial deviation. The race to build AI infrastructure seems to go on unabated. We saw that last week as Microsoft# and Meta Platforms# issued sterling earnings reports and strong forward guidance. But there were signs of stress and weakness elsewhere. Airlines noted a decline in future bookings. Healthcare companies suffered from a lack of Chinese business as well as reduced funding for new drug development and testing. McDonald’s# reported its worst same-store sales since the pandemic. Homebuilders had a poor spring selling season. Manufacturers had mixed results. Notably in Friday’s employment report, the manufacturing sector added only 11,000 jobs. So much for reshoring, at least so far. And while Friday’s labor report was solid, weekly unemployment claims unexpectedly jumped last week not because of any spike in claims from Federal workers. This is a data point to watch in coming weeks. Further rises would disturb markets.
The bond market sifted through all this and barely moved. 10-year Treasury yields wandered between 4.1% and 4.5% ending this past Friday at 4.3%. But the dollar fell sharply and only recovered slightly by the end of last week. Unless or until the dollar recovers, capital is likely to flow away from the U.S., not toward it.
The Liberation Day pronouncements sent markets into a panic assuming they were the coming status quo. That proved to be an overreaction and Trump moderated his tariff demands quickly. The initial reaction was overly pessimistic. On the other hand, the relief rally over the past two weeks may prove to be too optimistic. Negotiating over 100 trade deals isn’t going to happen overnight. They certainly won’t be done by July 2, when the Liberation Day tariff deferments run out. While the administration thinks one agreed upon template can be broadly applied, every nation and every treaty will have its own nuances. The likelihood is for further deferment of some tariffs but not all. We started this year with a worldwide tariff average of just over 3%. If all the Liberation Day tariffs were to be imposed, that number would be over 25%, perhaps the highest in U.S. history. Those who follow negotiations closely suggest an end point closer to 10-15%. Even that will be impactful.
While the tariff wars are seemingly against all nations, the greatest focus is on China, our largest economic competitor. While Trump claims the whole world has been ripping us off for decades, China is seen as the main villain. Its entry decades ago into the World Trade Organization (WTO) as a developing (rather than developed) nation has allowed it to engage in practices that would be considered unfair as a developed nation today including subsidizing business in various ways that we can’t. It also has been rightfully accused of stealing intellectual property, unfairly inhibiting U.S. businesses from doing business within China, and dumping excess production on the rest of the world below manufactured costs. All true. But China hasn’t just grown by breaking various rules or norms, it has focused on specific strategic sectors of its economy. Today, it is the world’s largest shipbuilder, the largest processor of rare earth materials, and the leading manufacturer of EVs. It is fast catching up to others, including the U.S., in artificial intelligence. Note the recent success of DeepSeek.
The U.S. is the world’s largest consumer. It had a big head start after WWII and never looked back. Our federal government has stoked our growth over the past three decades via deficit spending adding to our overall growth and making us the envy of the rest of the world. The all wanted to sell to us. Hence our balance of trade deficits that Trump wants to reverse.
In contrast, China is the world’s largest producer of goods. It produces more than the U.S., Japan and Germany combined. Because of a lack of safety nets like Social Security and Medicare, China, despite its massive size, cannot consume all it can produce. Thus, it is the world’s largest exporter.
Our tactics to combat these imbalances have been to impose a variety of barriers that are intended to reduce Chinese exports to the U.S. and slow down China’s ability to catch up and compete in various strategic arenas such as AI, strategic weapon development, biopharma, and semiconductor manufacturing. There are two ways to wage a battle. You can make your self better or you can make the other worse. If am in a bike race against Lance Armstrong, all things being equal, he wins every time. But if I make him ride a tricycle, I win every time. Tariffs, export controls and other barriers may slow China’s forward progress. But it isn’t a winning long-term strategy. It won’t make the U.S. better. What it might do is slow China’s progress but also create barriers that retard our own abilities to achieve our goals. China will sell to other markets or buy what it needs elsewhere. It graduates 10x the number of STEM graduates that we do in the U.S. It moves forward fast with available resources. Restricting the sale of the most advanced GPU chips to China may slow its progress but it also harms the U.S. producers of those same chips. What are we going to do should a Chinese pharma company develop a cure for Alzheimer’s? Wait until an American company develops an equivalent cure? Tax/tariff the use of that drug? Look what happened in China when it restricted the use of U.S. developed Covid-19 vaccines. It made its own pandemic worse.
When the Soviet Union launched Sputnik, it ignited a coordinated and massive effort to “win” the space race. We didn’t hinder Russia’s space program; we raced through a combination of government and private sector efforts to get to the moon first, a goal achieved. We are still leaders in AI, biotechnology, satellite communications, etc. But if we want to maintain our strengths and build upon them, it is foolish to impose any barriers to build upon our leadership and government should do whatever is reasonably necessary to support our nation’s entrepreneurial efforts to keep America great by ensuring that we remain leaders and can protect our supply chains. Requiring chip manufacturers to get export licenses is utterly counterproductive for anything less than the most advanced chips is completely misguided. The CHIPS Act was an attempt in the right direction. But government, rather than the private sector, is not the best allocator of capital. Instead of Washington picking winners and losers, a decision that always has political overtones, why not do what China does offering economic/tax incentives to anyone willing to invest dollars to meet critical and strategic initiatives. We do that all the time! Look at the EV industry as an example. These economic wars are going to be won by entities that can build the best products or deliver the finest services. The Henry Fords, Thomas Watsons, Gordon Moores, Steve Jobs, and Elon Musks of this world weren’t going to be denied because of tariffs or other government-imposed barriers to success. If the goal is to keep America great, in a nation with the greatest entrepreneurial spirit, government has to be friend and not foe. There is a place for barriers at times, but not all the time in all places. Building us up is a far better strategy than trying to tear our best and most strategic businesses down.
Today, singer Adele turns 37. Monty Python’s Michael Palin turns 82.
James M. Meyer, CFA 610-260-2220