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April 28, 2025 – Markets rallied as the Trump Administration suggested tariffs might be reduced against China and that ongoing negotiations with almost 100 countries are progressing, although no deals have yet to be announced. But even with tariff reductions, the headwind will still likely be the greatest in a century. So far, the impact is hard to measure as few tariffed goods have reached our shores. Early Q1 earnings reports show little impact through March, although managements have been loath to predict their ultimate impact. Stocks are likely to stay within a trading range until there is greater clarity regarding the impact of tariffs.

//  by Tower Bridge Advisors

Finally, we had a good week in the stock market. After a rocky Monday, when investors fretted over possible consequences should Trump attempt to fire Jerome Powell, equities rallied over the next four sessions once Trump put to rest such a notion, and Treasury Secretary Bessent commented that 145% tariffs on China might not last very long. Companies reporting early in earnings season mostly matched or exceeded expectations while tempering outlooks sheathed in tariff-related uncertainty. Given mostly modest changes to earnings forecasts, at least until there are more explicit signs of economic deterioration, investors shook off their worst fears. The rally was more a combination of a collective sigh of relief accelerated by short covering than any rising conviction that economic growth would reaccelerate.

Thus, we are now in a trading range bounded by the early April lows and the February highs. To break out on the upside, investors have to see recession risks minimized and stability in both the bond and currency markets. A downside breakdown would occur should growth and earnings be impacted by the tariffs already in place. To date, the impact has been minimal because tariffs were only imposed over the last two months and, for the most part, tariffed goods have yet to work their way through our consumption pipeline. Indeed, April sales have shown strength as consumers rush to buy goods already on shelves or on dealer lots that are tariff-free.

The Trump approach to date has been to punch every trading partner in the nose and see how they react. His process is designed to bring each to the negotiating table. When China entered the WTO more than a quarter century ago, it was granted developing nation status. That may have been appropriate for a nation just emerging from the confinements of a Mao world, but it is hardly apt today. Developing nations are allowed to subsidize businesses, and place restrictions on foreign investments in their own country, for instance. Developed nations cannot. If the U.S. is to succeed in even partially leveling the playing field with China, it will only happen after a long and difficult negotiation, one that most likely will be achieved in incremental steps.

Over the past two decades, the U.S. has learned that the just-in-time mantra breaks down in times of crisis. As supply chains became more global, the risks of breakdown have increased. We have heard a lot lately within all the tariff discussions about comparative advantage, a concept that says goods should be produced wherever the cost of production is the least. But what happens when supply chains break for whatever reason, political, climatic, or economic? If a weather-related disaster causes avocado crops to be cut in half, we will somehow survive. But when China announces it will cut off exports of processed rare earth materials, the production of everything from smartphones to cars would be impacted if such a ban were sustained for long.

Of course, export bans go in all directions. We have been restricting the sale of advanced computer chips to China for many years. But bans only work to a point. Lock one door and I will seek to find another way to get to the other side. Look at DeepSeek, the Chinese AI company that has shown it can deliver its own open-sourced large language models using a combination of chips developed in China and lower performance chips designed in the United States.

Bill Gurley, a prominent investor and venture capitalist, makes a distinction between finite and infinite games. A baseball game is a finite game. It has a start, an end point, and a clear winner. He would describe the stock market, for instance, as an infinite game. There may be a start point (your first investment), but there isn’t an end point. The race to AI superiority, or the race to overall economic superiority has no endpoint. The U.S. may be ahead for a time, but it isn’t a race we can win. All we can do is stay ahead for a time. China, seeing that it might need to be more self-dependent as it seeks to build itself into a leading economic power, has invested massively in key areas. It produces more STEM graduates per year than the United States by a factor of 10 or more. It established long-term goals years ago and sought to put its resources behind whatever was needed to achieve those goals. We are seeing signs of success today not just in DeepSeek but in the development of advanced medications, and electric vehicles. Being a much more centralized nation than the United States, China is able to be more focused. It states its goals prominently and then puts resources in place to execute them.

There are also clear problems with China’s approach. It vastly overspent developing real estate to the point where markets have collapsed. Chinese, experiencing steep drops in the value of their most important asset, their home, have become reluctant spenders. They already were big savers as China lacks the safety net of Social Security or Medicare, requiring them to save for future health and retirement costs. This imbalance has forced China to be an export nation as a prime generator of economic growth. Other nations often need to push back, preventing China from shipping subsidized cheap goods.

If there are lessons to be learned I think the following two are essential. First, the U.S. as a nation has to focus on its own economic security by making sure key parts of our economy can grow as unconstrained as possible with supply chains as U.S. based as possible. Examples are semiconductor manufacturing, having adequate energy resources (including a robust grid to support our needs), pharmaceutical production, and the capability to process onshore all the key components needed to support our growth. Added to the list would be to produce domestically whatever is needed to ensure our nation’s security.

In order to achieve these goals as quickly as possible requires significant change within our government. Trump clearly is trying to do this. In the administration’s haste, collateral damage has been done. While much has made the front pages, the overall damage beyond tariffs, has not been economically consequential to date. Perhaps workforce reductions in the U.S. could reach 200,000 or so this year. That sounds like a big number but it’s less than 10% of the number of Federal workers and a small fraction of less than 1% of the total U.S. workforce. In efforts to reduce the size of our federal bureaucracy in a meaningful way, the focus has to switch from headcount to process. Our bureaucracy is riddled with excessive rules and hoops that slow everything down. What can be built overseas in two years takes 5-10 here. Huawei, built and deployed over 100,000 charging stations to service the electric vehicle market within two years. The Inflation Reduction Act authorized almost $8 billion to support the buildout of a charging network in the U.S. when passed in 2021. As of last November, the number of stations added to the market by the U.S. was 214. That failure had nothing to do with headcount. The reasons for the disparity are obvious. Fixing the problem should also be obvious. But that won’t happen until the bureaucracy is dismantled. That is part of DOGE’s task. But the solution isn’t all within DOGE.

Congress needs to step up. So far, it has done nothing. It did next to nothing in its last session. Both parties should want to solve the problem but to date have shown no ability to work together. The result of all this bloat is an annual deficit of close to $2 trillion. While Musk declares annualized savings of $160 billion (undocumented) those are more than offset by increases in interest, Social Security and Medicare costs. The dollar weakness points to money exiting the U.S. Politics has something to do with this, but so does the bloated deficit and rising total U.S. debt. Deficit to GDP of 7% is absurdly high and unsustainable long-term. The only question is when does this evidence itself via higher debt service costs?

Which, finally, brings me back to markets. In today’s world, it is hard to separate extraneous noise and focus on what’s important to investors, the factors that impact long-term cash flows. Tariffs, of course, matter at least in the short run. They are a cost to do business. What they are projected to be changes day-to-day. What they actually will be, beyond the current shock and awe moment, remains to be determined. Comments last week suggesting moderation of Chinese tariffs were key to the rally in stock prices. Tariffs are only one input to the economic game plan. The rest of the cocktail consists of tax cuts, just in the development stage, and DOGE savings, still rather modest. Musk, like Trump, grossly exaggerates both size and timing. But, as noted earlier, the early savings from headcount reduction haven’t led to a reduction in government spending. In fact, so far this fiscal year, the Federal deficit is rising.

Stocks have rallied mostly because the worst outcomes feared shortly after Liberation Day have given way to a more moderate likelihood. But with that said and presuming further tariff moderation, we still face a world with the highest tariff/tax structure in a century. One cannot see, at least for the moment, a smaller fiscal deficit. This is where Congress comes in. So far, it has deferred to Executive Orders with hardly any Republicans daring to suggest that more tangible steps must be taken. It has passed a budget roadmap mandating a level of savings that don’t seem likely. Ultimately, it will have to agree to changes, including to the tax code, that start to move the country in the right direction. It is fast becoming time for Congress to force change on the White House, not the other way around. If it doesn’t, deficits will continue to rise, and the ability to support them without incurring even greater debt service cost will decrease. Clinton had to deal with Blue Dog Democrats. The outcome worked to the nation’s benefit. Now it is the Republicans’ turn. If nothing changes and deficits are not constrained in some manner, this past week’s rally won’t last for very long.

Today, Jessica Alba is 44. Penelope Cruz turns 51. Jay Leno is celebrating his 75th birthday.

James M. Meyer, CFA 610-260-2220

Tower Bridge Advisors manages over $1.3 Billion for individuals, families and select institutions with $1 Million or more of investable assets. We build portfolios of individual securities customized for each client's specific goals and objectives. Contact Nick Filippo (610-260-2222, nfilippo@towerbridgeadvisors.com) to learn more or to set up a complimentary portfolio review.

# – This security is owned by the author of this report or accounts under his management at Tower Bridge Advisors.

Additional information on companies in this report is available on request. This report is not a complete analysis of every material fact representing company, industry or security mentioned herein. This firm or its officers, stockholders, employees and clients, in the normal course of business, may have or acquire a position including options, if any, in the securities mentioned. This communication shall not be deemed to constitute an offer, or solicitation on our part with respect to the sale or purchase of any securities. The information above has been obtained from sources believed reliable, but is not necessarily complete and is not guaranteed. This report is prepared for general information only. It does not have regard to the specific investment objectives, financial situation or the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed in this report and should understand that statements regarding future prospects may not be realized. Opinions are subject to change without notice.

Filed Under: Market Commentary

Previous Post: « April 24, 2025 – “Headache” is the official Journal of the American Headache Society. Europe and Asia have their own publications and consortia devoted to the study of headaches and pain. The incidence of headaches may have increased for those following the stock market gyrations over the past few months, though resolution of tariff issues would go a long way toward calming markets down. Eventually. Near-term impacts on inflation and the economy may create some pain points and additional volatility if consumers and businesses retrench.
Next Post: May 1, 2025 – U.S. GDP unexpectedly contracted by 0.3% in the first quarter, the first decline since 2022, largely due to a surge in imports ahead of anticipated tariffs. Despite this GDP contraction, major tech companies like Alphabet, Microsoft, and Meta reported quarterly earnings, indicating continued strength in areas like advertising and cloud computing. However, concerns remain about the broader economic outlook due to uncertainty surrounding tariffs, potentially leading to higher prices, weaker employment, and a challenging environment for the Federal Reserve regarding inflation and interest rate policy. »

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  • May 22, 2025 – Memorial Day Weekend is typically the unofficial start of summer for many. However, this year has been anything but typical. Corporate earnings have been holding up based on recent company reports and outlooks. Tariffs have dented a few earnings reports, but the consumer continues to spend. Credit spreads are not indicating a recession yet, although interest rates have been on the rise as Congress works on a spending resolution bill. Markets gave back some of their recent gains yesterday but are still only about 5% from their all-time highs. Not quite bear market territory. Anyone traveling this weekend to a national park should remember to bring their bear spray.
  • May 19, 2025 – Stocks have clawed back all their post-Liberation Day losses as the perceived impact of tariffs have lessened. But now comes the hard part. Whatever tariffs are imposed will have economic consequences that we are only just starting to see. The big tax bill as originally proposed is a budget buster. 10-year Treasury yields are now back above 4.5%. With hindsight equity investors overreacted after Liberation Day. The subsequent rally may have gone too far as well.
  • May 15, 2025 – Following a big rebound, the S&P 500 is flat YTD but trades at a high valuation of 23x forward earnings. Consumer spending faces headwinds from rising student loan defaults and a cooling housing market. While recession fears have eased, the economy is slowing and inflation trends remain uncertain.
  • May 12, 2025 – China and the United States have agreed to reduce tariff rates on each other by 115% leaving our tariff rate on Chinese goods at 30%. Since shortly after the shock of Liberation Day that sent equity investors into panic mode, there has been a gradual retreat from an overbearing tariff framework outlined that day. Today’s suspension of tariffs, pending further negotiations may not be a final step. But it comes right out of the Trump playbook that shoots for the moon first and then settles into a much more compromised reality later. While tariff negotiations continue not only with China but the rest of the world, investors can now focus on the next leg of the Trump agenda, tax cuts.
  • May 8, 2025 – The Federal Reserve on Wednesday held its key interest rate unchanged in a range between 4.25%-4.5% as it awaits better clarity on trade policy and the direction of the economy. While uncertainty about the economic outlook has increased further, the Fed is taking a wait and see stance toward future monetary policy. Meanwhile, the S&P 500 Index has just about fully recovered its losses following the April 2nd “Liberation Day” when major tariffs were announced on U.S. trading partners. The bounce in risk assets is welcome, but we are still looking for white smoke signals showing that progress on inflation and tariffs is being made.
  • May 5, 2025 – Investors overreacted to Trump’s early tariff overreach but may have gotten a bit too complacent that everything is now back on a growth path. While there are few signs of pending recession, the impact of tariffs already imposed are just starting to be felt. So far, no trade deals have been announced although the White House claims at least a few are imminent. The devil is always in the details. Congress will start to focus on taxes. Conservatives may balk but there is little indication to suggest they won’t acquiesce to White House pressure once again.
  • May 1, 2025 – U.S. GDP unexpectedly contracted by 0.3% in the first quarter, the first decline since 2022, largely due to a surge in imports ahead of anticipated tariffs. Despite this GDP contraction, major tech companies like Alphabet, Microsoft, and Meta reported quarterly earnings, indicating continued strength in areas like advertising and cloud computing. However, concerns remain about the broader economic outlook due to uncertainty surrounding tariffs, potentially leading to higher prices, weaker employment, and a challenging environment for the Federal Reserve regarding inflation and interest rate policy.
  • April 28, 2025 – Markets rallied as the Trump Administration suggested tariffs might be reduced against China and that ongoing negotiations with almost 100 countries are progressing, although no deals have yet to be announced. But even with tariff reductions, the headwind will still likely be the greatest in a century. So far, the impact is hard to measure as few tariffed goods have reached our shores. Early Q1 earnings reports show little impact through March, although managements have been loath to predict their ultimate impact. Stocks are likely to stay within a trading range until there is greater clarity regarding the impact of tariffs.
  • April 24, 2025 – “Headache” is the official Journal of the American Headache Society. Europe and Asia have their own publications and consortia devoted to the study of headaches and pain. The incidence of headaches may have increased for those following the stock market gyrations over the past few months, though resolution of tariff issues would go a long way toward calming markets down. Eventually. Near-term impacts on inflation and the economy may create some pain points and additional volatility if consumers and businesses retrench.
  • April 21, 2025 – Tariffs raise barriers that make imports less desirable. They serve to reduce the balance of payments. But by protecting local producers of higher cost goods, they are inflationary. The attendant decline in the value of the dollar chases investment capital away, capital necessary if reshoring of manufacturing is going to be achieved. The goal of the Trump administration should be to find the balance that favors U.S. manufacturers but retains investment capital within our borders. So far, markets suggest that dilemma hasn’t been resolved.

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