NEWS
What Happened This Week
The Producer Price Index (PPI) surprisingly showed costs falling -0.4% in March, led by the decline in food and energy prices. Goods and services both declined in price. Estimates had been for a 0.2% increase.
Many electronic goods, including smartphones and computers, were temporarily exempted from reciprocal tariffs, which dramatically lowers the effective tariff on Chinese imports in total.
Real US economic growth (GDP) is still projected to be positive in the US, with the Bank of America projecting ~1% and the Federal Reserve estimating 1.7%.
While forecasts for global growth have been reduced, the chances of a recession still appear unlikely according to the International Monetary Fund (IMF).
The S&P 500 continues to show at least a short-term downtrend, with the 50-day moving average below the 200-day moving average and the monthly Relative Strength Index (RSI) likely to drop below 50 next month.
How I See It
A big key to markets resuming the bull market comes down to the ability for the Trump Administration, along with the Federal Reserve, to manage expectations.
As I’ve said previously, the impact of tariffs on inflation is likely overstated and over feared.
Certain goods would go up in price (perhaps 12%-14% of the goods we purchase as consumers). But less money to spend on other goods would likely mean a fall in demand, leading to prices in other areas slowing or even coming down.
Now that’s not great for the economy, because companies have to make a profit. Smaller profit margins mean greater need to restructure, which often leads to layoffs. And that means potential recession.
But let’s assume the effective tariff rate is around 20% on goods imported to the US. If we import around 12% of our goods and services, then simple math (and this definitely IS oversimplified for illustration) says 12% x 20% = 2.4% potential increase in costs to a consumer’s total spending.
But that’s not likely to happen, because tariffs spark change: in supply chains, in automation and structure of an organization, in willingness to reduce profit margins to compete, in willingness to negotiate for lower tariffs, etc.
In March, the Federal Reserve estimated a 2.7% increase in 2025 for the Personal Consumption Expenditure (PCE), a measure of inflation. That estimate was already accounting for the tariffs on our major trading partners. Maybe the new tariffs announced in April change that number. Let’s say it brings it up to 3.4%.
For someone whose monthly expenses are $5,000, this means they will have to come up with an extra $170 each month by the end of 2025. Of course, this is a speculative estimate.
But let’s also consider what the end game is meant to be here. A huge reason for the tariffs across the board is in order to dramatically lower, or even eliminate, the personal income tax.
A single individual earning $60,000/year, assuming a standard deduction, might pay something like $5,000 in federal taxes for 2025.
If taxes could be cut even $2,000 for someone like this, it potentially puts the money back in the individual’s pocket which pays for the increase in prices.
Now in reality, things rarely turn out this straightforward. Companies adjust prices based on demand, salaries might adjust either way for the change in income tax structure, etc. There are plenty of other ways this could end. The real question is whether there is a real chance at success in restructuring the economy in such a dramatic way that sustains itself over time.
For now, my prediction is that markets will likely continue to see more downside for at least another month, though it could carry on until July or August if big surprises to economic rules become the expected norm.
Downside potential from here? I would be surprised if there were more than 12%-13% drop from this point, unless expectations plummeted so badly that a recession was induced. Upside? I think over the next 12 months, it stands a chance at 15%-30%.
So in my opinion, unless someone is a short- to intermediate-term investor, weighting the odds in favor of growth means staying the course and waiting out the volatility for the days when market optimism returns.