NEWS
What Happened Last Week
Tariffs of 25% on Canada and Mexico went forward on Tuesday, but tariffs on certain imports covered under the 2020 trade agreement were then suspended on Thursday until April 2 to offer additional time for each country to crack down on the fentanyl smuggling across the US border.
To get ahead of the tariffs, US imports dramatically increased far above exports in a way which was not anticipated by forecasts. Net exports (exports minus imports) for January were -3.7% instead of the expected -0.41%.
A large part of this increase in imports included gold bars.
China has fallen to the number two spot for biggest exporter to the US, while Mexico has taken first place.
Weekly jobless claims fell 21,000 to 221,000, but overall February unemployment reported higher at 4.1% instead of an expected 4%.
Multiple predictive models show warning signs of potential overvaluation of the US market.
Euro zone inflation continued to slow to 2.4% in February, though it was still a hair above expectations.
President Trump announced a plan to establish a strategic reserve of cryptocurrencies already owned by the US government. It remains unclear how much the government is likely to add to the reserve in the future.
How I See It
When the price of the S&P 500 drops below its 200-day moving average, there is a higher than 50% chance that it will drop over the course of the next day.
On Friday, the S&P 500 closed at $5,770.20, slightly above it’s 200-day moving average at $5,733.10. Today, it has opened below at $5,705.37.
Stocks have entered “pullback” territory (down 5%-10%) since their high point on February 19. This has happened over a matter of less than three weeks.
It’s too early to speculate with precision whether this is a reversal of the trend or a short-term swing, but there are enough red flags developing that could continue to keep markets volatile in the months ahead.
The combination of tariff uncertainty as well as government layoffs are having an impact, though not one likely to affect years into the future.
Tariffs are used as a negotiating tool, one which President Trump is ready and willing (and eager) to drop if he can elicit cooperation on border control.
Government layoffs are unlikely to move the needle much on unemployment, as about 2% of federal workers have been laid off through February. And federal jobs only make up about 2% of the total US employment. A 2% cut of a 2% portion is 0.04%. And several former employees have already found work elsewhere.
So while there is still plenty for investors to worry about, I don’t believe it’s enough yet to cause a recession. We could see negative real GDP growth in Q1 (due to the frontrunning import spike), but not likely due to severe weakness in the economy.
This looks to me like a pullback, or even a correction, is likely this year. A full on bear market? Possible. But I don’t see a recession as a likely outcome right now, and bear markets usually precede a recession by several months.
What I’d like to see is continued sideways movement overall, or a slow uptrend, that results in anything between a 5%-15% return by the end of the year. In my opinion, that would be a reasonable and sustainable outcome with what the current public data shows.