NEWS
What Happened Last Week
Headline inflation (CPI) showed 3% over the last twelve months, with core inflation (excluding volatile food and energy prices) at 3.3%.
Goods have been experiencing deflation for the last couple of years, whereas services have been driving the high inflation. Both appear to be trending toward stabilization.
Month-over-month inflation, however, has seen an acceleration that disappointed expectations.
Stock markets came close to an all-time high Thursday and Friday after several companies reported higher earnings than expected.
President Trump announced his intention to implement reciprocal tariffs on countries which charge their own tariffs on imports from the US.
Consumer spending on imported goods last year made up 11.2% of GDP.
How I See It
Inflation still remains the big concern that seems to keep markets from becoming euphoric in their expectations.
While actual and potential tariffs are touted as inflationary, I think this is a solid reason why markets can actually continue their positive trend.
The scare of tariffs, and their actual results in real life, I think are mismatched.
First, imported goods only made up 11.2% of GDP last year in the US. Even if President Trump follows through on the tariff talk (assuming the respective countries aren’t willing to come to terms), then the rise in prices is a relatively small makeup of the total economy.
Beyond that, companies first tend to reorganize supply chains or cut costs elsewhere in order to attempt to compete on price.
Finally, Milton Friedman convincingly proposed that inflation is “always and everywhere a monetary phenomenon.” Sustained inflation (excluding short-term supply/demand disruptions) largely results from the growth rate of the money supply, which has been 3.9% as of Dec 2024, below the average 7%+ of the past 65 years.
In conclusion, I believe the stock market is high, but high markets can continue for years before a bear market hits. The continued uncertainty surrounding the impact of tariffs and high interest rates, I think, gives room for reality to positively surprise expectations little by little throughout the year.
And I hope that means markets are up moderately from start to finish of 2025.