Market Update

As we wrote back on April 3rd, “deglobalization should serve as a headwind for markets.” The markets agreed. Since then, the draconian tariffs announced on April 2nd, leading to a sharp decline in stocks, have been walked back. As a result, the panic we saw in early April has turned to euphoria, and US equities have ripped nearly 20% higher in less than two months.

What to make of all this? The first Trump Administration was marked by a pronounced pro-business and pro-growth approach. From an economic/markets perspective, Trump 1.0 was all about tax cuts and deregulation. Last November, a continuation of this approach was assumed following the election, leading to a strong market rally, and outperformance by companies directly benefitting from such an environment (e.g. asset managers and investment banks).

In April, these animal spirits were dashed, as Trump 2.0 focused on anti-growth policies: tariffs (which act as a tax increase and a barrier to trade), deficit reduction (a short-term headwind for economic growth), and reduced immigration (anti-growth and pro-inflation). Hence the April 2nd to April 9th market panic.

However, beginning on April 9th with the postponement of certain tariffs, Trump 2.0 began to morph back into Trump 1.0. Tariffs on China and Europe were walked back. DOGE and other austerity measures have faded out of the limelight. The latest narrative in this trend happened this past week, with a US trade court ruling that President Trump’s global tariffs are illegal. We expect this is a conflict that will eventually go to the Supreme Court.

This shift has given rise to a new Wall Street acronym: TACO (Trump Always Chickens Out). The President was even asked about this idea yesterday by a reporter from CNBC. He clearly did not like it, but it has been the objective reality. Whatever one thinks of the idea of “short term pain for long term gain,” the Administration’s will to affect a “detox” of government spending and trade deficits is questionable at best.

As such, the focus of investors has shifted from the tariff-induced growth scare of April (stocks down), to expectation of continued “status quo” deficit spending (stocks up). De-escalation of the “Liberation Day” tariffs is squarely pro-growth. Endless deficit spending is pro-inflation. This is bad for bonds, as we have seen with global bond yields rising, and good for equities (to a point). While it takes the “left tail” outcome of a global trade/growth collapse off the table for now, at least, it raises the risk of a return of the “bond vigilantes,” as we wrote about back in 2023. Should the monetary/fiscal authorities “lose the bond market” (i.e. 10-year Treasury yields above 5-6%), we suspect the equity market would not fare well.

Last month, we discussed opportunities we were seeing across both Quality Growth and Defensive Value stocks. There were good buying opportunities in April, and we were generally a net buyer of stocks. As we wrote at the time: “For long-term investors, we are starting to see super high-quality companies trading at legitimately cheap valuations for the first time in three years.”

As we sit today, there are far fewer opportunities with the S&P 500 trading around 22x forward earnings. Inflation remains slightly elevated, the Fed is content to hold their ground, and economic growth is slowing versus 2024 levels. We have shifted to being net sellers of stocks in recent weeks.  

This is not to say that bullish drivers do not exist. The TACO trade as tariffs de-escalate is in full force. Corporate earnings, particularly in the AI/Datacenter space where we have substantial exposure, have been solid. Continued government deficit spending and additional tax cuts are certainly stimulative to the economy (as it was in 2023-24), but only up to the point where markets begin to worry again about inflation. We believe bond markets are signaling that these risks are clear and present.

As we have expressed to clients this year, this high volatility environment echoes the 2018-19 period, when stocks made decent gains from point-to-point, but experienced six 10% corrections and one 20% decline. Against this backdrop, staying the course with a properly diversified portfolio makes sense. All-in yields on fixed income (including cash and short-term bonds) are competitive with expected equity returns. Equity investor sentiment has shifted from dour to complacent. While we refrain from making short-term, wholesale changes to our investment portfolios, we do think the market is giving investors an opportunity to evaluate future cash needs, and overall risk tolerance, following the recent rally in stocks.

We provide the information in this newsletter for general guidance only. It does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, investment, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. The information is provided “as is,” with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, expressed or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.

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