The futures market suggests a positive open to today’s stock trading. There are no new economic data reports scheduled for this morning. Tonight, Philadelphia Federal Reserve President Patrick Harker and Atlanta Fed President Raphael Bostic will speak on prospects for the domestic economy, as well as central bank rate policy. The Fed next meets in early May, and the consensus among economists is that short-term rates will stay in the range of 4.25%-4.50%, given uncertainty surrounding President Trump’s global trade strategy. Wall Street is holding out hope that the federal funds rate will be cut in two one-quarter-point increments before yearend, which is by no means guaranteed.
A new earnings season has begun, with the earliest-reporting U.S. major banks turning in solid first-quarter results. That said, bank managers are concerned import tariffs will hurt consumer demand, slow business activity, and reduce overall employment. They are refraining from offering revenue-and-income guidance for the coming quarters. The companies feel their outlook is unclear unless the White House clarifies its playbook for the months and years ahead.
Last week, the major domestic stock market indexes displayed a firming. The tech-heavy NASDAQ composite, broader Standard & Poor’s 500 index, and the blue-chip Dow Jones Industrial Average recovered 7.3%, 5.7%, and 5.0%, respectively. Still, the indexes are significantly down since the start of this year. Supporting stock valuations recently was President Trump’s announcement of a 90-day suspension (through July 8th) of harsh reciprocal import tariffs aimed at some 100 countries. A base-line 10% duty will remain in place for goods shipped from allies and others. Tariffs on goods from China will remain higher, with a carve-out for certain electronics categories.
President Trump has imposed an aggregate, eye-popping, combined 145% tariff on goods coming from China, the second-largest economy in the world. China has retaliated with a 125% tariff, which it calls its final move. These tariffs carry the danger of seizing up global goods transactions, especially with regard to furniture, appliances, apparel, toys, footwear, and sports equipment. After lobbying on the part of industry leaders, officials in the White House said Draconian tariffs on electronics, personal computers, and semiconductor chips are being lifted, to Wall Street’s relief.
Decades of free trade have led to intricate supply routes around the globe that a majority of domestic businesses are dependent upon. President Trump aims to bring back manufacturing to the United States, which is commendable. Even so, such an ambition cannot be realized overnight. It will take many years to develop new production plants, particularly those supporting the electronics, machinery, medical equipment, and pharmaceuticals sectors. Labor-intensive undertakings in, for example, apparel making and auto wiring harness production, seem not to be doable at a profit for companies here. Additionally, blue-collar workers are scarce, and Generation Z does not appear especially interested in factory employment. Restrictions on immigration will be a factor as well.
In the near term, shortages of consumer goods likely will emerge and inflation accelerate. Small and mid-sized businesses will probably be under the greatest stress, with many potentially going belly up. Large corporations have the wherewithal to hunker down by slowing output and reducing investment. This suggests a recession could be at hand. Bond markets are showing considerable strain. New trade agreements would help to stave off such a worrying outcome, but they are not certain to be reached.
We advise investors to maintain a defensive portfolio position and to focus on large-cap companies with traditionally reliable cash generation throughout the business cycle. Holding more cash in individual investment accounts appears most prudent, for now. – David M. Reimer
At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.
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