Happy Sunday. A relatively quiet week in the markets was a welcome surprise for many tech investors as the volatility we’ve seen over the past month died down a bit. QQQs didn’t budge finishing close to flat. Semis -1% underperformed led by some sell the news around NVDA’s GTC and a mixed print by MU on Friday.
Non-profitable tech and retail favorite names led the way higher. BAML had a good chart showing that the names that were weakest to start the year through March 12th have outperformed since then:
Our view of the market hasn’t really changed from the last two weeks: we continue to expect a choppy and potentially upwards trending market. Over the last two months, the market has increased its recession probabilities and re-priced the Trump Tariff/Bessent/ DOGE risks; however, we find it hard to get outright negative on the markets unless we get another step down in growth. On that front, we should get a positive update to the Atlanta Fed’s GDP NOW model, whose downtick back in mid/late Feb was a catalyst for the recent growth scare:
The other macro print to watch this week is PCE on Thursday and another update to UMich on Friday. We continue to think macro releases will play an outsized role in the direction of the market in the coming weeks. We continue to run fairly low gross/net, but have increased both slightly over the last week. Most importantly, we continue to remain flexible and open-minded about the path forward.
The real key catalyst investors have their focus on is Apr 2 or “Liberation Day” as Trump likes to call it, which is the kickoff and starting point for a comprehensive US trade negotiation strategy aimed at securing better terms from global partners. One could argue we’re finally getting to the essence of Trump’s American First Trade Policy, and that the initial actions involving Canada and Mexico were more centered on immigration/fentanyl issues, which also served to underscore Trump’s “seriousness” ahead of April 2nd. Will other countries take the hint offer meaningful concessions on tariffs sooner rather than later?
The initial tariffs announced on Apr 2nd are likely to be elevated and aggressive, servicing as a negotiation baseline rather than a final figure. The tariffs will likely focus on the trading partners who had the largest deficits last year: China, Mexico, Vietnam, Ireland, Germany, Japan, S Korea, India. >100 countries will likely avoid reciprocal tariffs largely because we don’t do much trade with them. China will likely take the brunt of the most extreme tariffs as they have largest trade deficit and plenty of ways in which they act unfairly. Despite some hopeful reports of Trump and Xi meeting in June, there really hasn’t been much contact between the two countries. Is FXI price action this week telling us something similar?
A glass half full bull would argue that the news only gets better after Apr 2nd - one can imagine the playbook in typical Trump style: set a ridiculously high tariff %, put out an artificial trade deadline and then get high praise for securing last-minute resolutions to maximize concessions.
So far, there are tea leaves that Trump might take a less chaotic approach this time around:
Kevin Hassett, Trump’s National Economic Council director, said markets are OVERESTIMATING the scope. “One of the things we see from markets is they’re expecting they’re going to be these really large tariffs on every single country,” he told Fox Business host Larry Kudlow... “I think markets need to change their expectations, because it’s not everybody that cheats us on trade, it’s just a few countries and those countries are going to be seeing some tariffs.”
In addition, there are some signs that major trading partners are actively proposing concessions, potentially avoiding initial tariff enforcement in some cases. Trump will likely play the bad cop hardline talker while Lutnick, Bessen, and Hassett (similar to the above quote) will try to help in tempering' the market’s reaction.
The glass half-empty take:
We have loosely held opinions on what happens after Apr 2 and we’ll read the tea leaves as they come and balance that off with how we think investors are approaching the situation.
Where do we stand on the market heading into this week?
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