Last Week
In our last commentary, we discussed the onset of the tariff fog. It is safe to say that the fog thickened dramatically, as the details unveiled were far denser than even the most draconian forecast.
President Donald Trump’s “Liberation Day” turned into “Obliteration Day” as the stock market suffered its worst tumble since the market crash at the onset of the COVID-19 pandemic in March 2020. The S&P 500 sank 9%, and the Nasdaq Composite and Russell 2000 shed 10% and 9.7%, respectively. The Utility sector fared the best with a 4.4% loss, while Energy stocks were battered with a 14.3% spanking as crude oil prices cratered 11%. Declining issues overwhelmed advancing issues by a factor of 15-1, with over 1000 companies reaching 52-week lows. The U.S. dollar remained under pressure, dropping over 1%, and even Gold retreated. All that glittered was long-term bonds, as the 10-year Treasury yield reached 3.99%, down 26 basis points for the week. The “Trump Bump” from November was based on the rationale that the Administration’s policies would be business-friendly. Thus far, the exact opposite seems to be closer to the truth. Another building block for bullishness was the belief that the Fed would cut interest rates to a more neutral rather than restrictive level. Unfortunately, monetary policy has remained tight, and on Friday, Fed Chair Jerome Powell indicated that interest rate cuts were on hold in response to the inflationary impact of the much broader and disruptive tariffs.
A bright spot this week was a strong March nonfarm payrolls report. However, common sense and most economists suggest that the jobs market is likely to soften dramatically in the coming months.
We asked noted economist Robert Z. Aliber for his thoughts on the international trade landscape. Here is his response:
“The United States first developed what has proved to be a persistent and increasingly large trade deficit as a result of growing foreign purchases of U.S. dollar securities, which led to an increase in the price of the U.S. dollar in the currency market. U.S. imports of foreign goods surged. U.S. exports of securities displaced U.S. exports of goods; nevertheless, despite the higher price of the U.S. dollar, the United States is the second largest exporter in the world.
One of the costs of the U.S. trade deficit is that U.S. manufacturing employment is three to four million below the level that might have been achieved if U.S. imports more or less matched U.S. exports. Some of these job losses are evident in abandoned factories, some are not evident because the investment in new factories has been lower than it would have been if the price of the U.S. dollar had been fifteen or twenty percent lower. The U.S. fiscal revenues have been smaller, and the U.S. fiscal deficit has been larger by hundreds of billions of dollars because of the lower level of U.S. GDP. President Trump’s “trade liberation” strategy is the first bid in what will be a prolonged set of negotiations. Eventually those negotiations will center on countries that have extraordinarily large trade surpluses relative to their GDPs; the Trump message is that they can no longer rely on “beggar thy neighbor” policies for their growth strategies. Access to the U. S. market is a valuable asset, and America’s trading partners will make numerous concessions to ensure that they will be able to sell in the United States. The Trump approach of a New York real estate developer is in stark contrast to the traditional approach of negotiating reductions in Tariffs and trade barriers that proceeds in one-quarter inch increments.”
We appreciate Professor Aliber’s thoughtful contribution to this week’s analysis.
The natural human emotions of fear and greed tend to lead to trading whiplash and investment underperformance. Given the constantly and violently shifting landscape, trying to pick tariff winners and losers is a risky proposition. Investing in companies trading at reasonable valuations, with solid balance sheets, resilient and transparent business models, attractive growth prospects, and leadership teams aligned with shareholder interests is the framework we follow in the North Star Funds to construct our portfolios. Additionally, we advise investors to establish an appropriate target equity allocation range to weather the storms while still participating in the attractive long-term returns the stock market has provided. Although the timing is uncertain, and it may get worse before it gets better due to the poorly thought-out approach to addressing the trade imbalances, this fog will ultimately lift.
This Week
The slings and arrows of the outrageous (tariff) fortune will continue to dominate the narrative.
On Thursday, the Bureau of Labor Statistics will release the March consumer price index. Expectations are for a decrease to a 2.6% year-over-year increase. Under normal circumstances, that report could generate investor enthusiasm.
The first quarter earnings season will kick off on Friday, with the big banks and brokerage firms reporting results.
The stocks mentioned above may be holdings in our mutual funds. For more information, please visit www.nsinvest.com.