This morning brought some very important news on the U.S. economy (see below), but it is once again taking a backseat to the ongoing international trade developments. That is because news broke yesterday that the Trump Administration has pivoted on the tariff front. Investors were relieved to hear that President Trump authorized a 90-day pause on the reciprocal tariffs announced last week, with the one exception being China. This decision will give the Administration time to renegotiate trade deals with more than 75 nations, while keeping pressure on China. The news sparked an enormous intra-day rally for the major equity averages, with the S&P 500 Index eventually recording its biggest one-day gain since 2008 and the NASDAQ having its best day since 2021when the market was recovering from the damage done during the COVID-19 pandemic. Overall, the Dow Jones Industrial Average, the NASDAQ Composite, and the S&P 500 Index rallied by 2,962, 1,857, and 474 points, respectively.
On the economic front, the Labor Department released the March Consumer Price Index (CPI) data at 8:30 A.M. (EDT). Specifically, the CPI fell 0.1% on a month-to-month basis, while the core CPI, which excludes the more volatile food and energy components, rose just 0.1%. The headline figure showed an unexpected decrease in the pace of price growth, which had to be some relief for the Federal Reserve as calls grow for the central bank to cut the federal funds rate to help counteract the possible negative impact of the Trump Administration’s trade policies on domestic growth. On a 12-month basis, the CPI and core CPI increased 2.4% and 2.8%, respectively, with both readings also coming in below forecasts. The equity futures, which were lower heading into the CPI data, are still presaging a down opening to the trading day stateside. The ongoing trade dispute between the United States and China, the world’s two largest economies, is likely to remain a headwind for the global stock markets.
The CPI report was not the only release this morning. We also learned from the Labor Department that initial jobless claims for the week ending April 5th totaled 223,000, which was up 4,000 from the prior week’s revised figure, but still indicative of a tight labor market. Later this morning, we will hear from a number of Federal Reserve officials, including the presidents of the Federal Reserve Banks in Boston, Chicago, Dallas, Kansas City, and Philadelphia. In addition, Federal Reserve Governor Michelle Bowman will give testimony before the U.S. Senate. Normally, such commentary would move the equity and bond markets, but given the ongoing trade news it is unlikely to have much of an impact on the direction of trading today.
In general, trading continues to be event-driven as markets around the world are closely attuned to the aforementioned ongoing global trade disputes. Wall Street hates uncertainty, and it is getting a lot right now in the form of global trade policies. The unpredictability surrounding the Trump Administration’s trade policies has caused the volatility in the equity and bond markets to spike, with the CBOE Volatility Index (or VIX), also known as the “fear gauge,” soaring earlier this week, to above 50, before settling at a still-high 33.62 yesterday afternoon. The volatility has been substantial since April 2nd, the day President Trump announced a series of tariffs against 185 nations, including many of the United States’ major trading partners. The noted 90-day moratorium on the higher “reciprocal tariffs” against all nations, save for China which faces higher levies, now gives the Trump Administration time to negotiate new trade deals with over 75 countries. Likewise, reports from the Continent earlier this morning said the European Union also will take a 90-day pause on its retaliatory tariffs. This eased Wall Street’s concerns a bit, at least for the moment. However, much like we saw yesterday, the trade developments remain highly fluid and can change the direction of trading on a dime.
It also should be noted that the pharmaceutical stocks, including shares of Eli Lilly (LLY), Novartis AG (NVS), Pfizer (PFE), and Merck & Co. (MRK), rallied after the trade announcement from the Trump Administration yesterday. On Tuesday, President Trump said a “major” tariff on pharmaceuticals was coming shortly after he had exempted pharmaceuticals from his tariffs unveiled last week. The Trump Administration believes that tariffs would incentivize drug companies to move manufacturing operations to the United States. The pharmaceutical industry’s domestic manufacturing has shrunk considerably in recent decades, with key parts of the production process moving to China, India and other countries where labor and other costs are cheaper. This situation remains fluid and may well lead to more near-term volatility in a sector that has historically been more defensive in nature.
So what is an investor to do in this volatile environment? Our first recommendation would be to not overreact to the daily swings of trading, as it could result in investors missing out on a rally like yesterday’s. However, taking a bit more defensive stance to ride out this period of heightened volatility may be warranted. We continue to recommend a diversified portfolio consisting mostly of the stocks of high-quality companies with reliable cash flows, and cash-equivalent securities. We would start by focusing on the stocks that are ranked 1 (Highest) or 2 (Above Average) for Safety by Value Line and within that group target the companies that do a significant amount of their business in the domestic market. Many of the multinational companies remain out of favor, as investors are worried that their operating performances will be hurt significantly by the U.S. tariffs imposed and the retaliatory levies by the nations where they do a significant amount of their business. In particular, the stocks of China-based companies have all felt the wrath of investors in recent trading sessions, and this may continue for as long as the nation’s two-largest economies remain in a trade war. - William G. Ferguson
At the time of this article’s writing, the author did not hold positions in any of the companies mentioned.
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