The Trump administration invoked the International Emergency Economic Powers Act (IEEPA) this week to address widening trade imbalances by imposing broad trade tariffs across the globe.  While the founding fathers originally gave Congress the power to impose tariffs, over the past sixty years we’ve seen Congress turn more of those powers over to the executive branch.

The tariffs were much higher than expected by the markets, sending stocks sharply lower this week.  International stocks (red) remain positive year-to-date and government bonds (dark blue) and corporate bonds (light blue) are moving higher.  However, the S&P 500 (pink) is down about -8% and the Nasdaq (green) is down roughly -12% as of market close on Thursday.

This stock market decline is natural as investors recalibrate their expectations for growth in light of the tariffs.  But the magnitude of disruption to global markets by the tariffs is likely to lead to major unintended consequences.  While some may be good, many won’t be.

As stock prices have fallen this week, we’ve seen interest rates decline, oil prices collapse, and the US dollar weaken.  Although they’ve occurred for unfortunate reasons, these declines could partially offset potentially higher prices to come.

https://tradingeconomics.com/commodity/crude-oil

 

There’s no doubt that risk in the markets and global economy is rising.  Prior to the announcement of these tariffs, “soft” data on the US economy was showing signs of weakness while the “hard” data was still strong.  Soft data generally refers to sentiment surveys (how consumers feel) and consumer expectations.  Hard data is more quantitative, such as the unemployment rate, inflation, and economic growth (GDP).

For example, consumer confidence has been declining this year and short-term inflation expectations have risen.

But today, the March jobs report was released and showed 228,000 jobs were created in March vs expectations of 140,000.  The unemployment rate rose from 4.1% to 4.2% as more workers entered the job market.

The tariffs have now hung a cloud of uncertainty over the economy, causing many companies and consumers to freeze spending plans until there is more clarity.  If this uncertainty hangs around too long, the weakness we were already seeing in the soft economic data will manifest itself in the hard data, leading us closer to a recession.  Markets now expect the Fed to cut interest rates up to four times this year to counter a slowdown, but the Fed will now be flying blind with regards to inflation, unable to separate the effects of tariffs and demand on rising prices.

Now is the time to remember a well-diversified portfolio is designed to get through uncertainty and even recessions.  Our proprietary risk model recommended an additional reduction in equity exposure for tactical strategies once again on March 31 and remains very defensive.

Have a great weekend.

 

Jack C. Harmon II, CFP^®, CIMA

Principal, Harmon Financial Advisors

Registered Principal, Raymond James Financial Services

 

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