April showers came a month early as stocks fell in March (and Q2 is off to a rough start as well….).
Tariffs had already been the primary cause of market jitters, but now the Trump Administration doubles down by announcing on April 2nd its broader policy initiatives for the use of ongoing Tariffs.
The odds of recession over the next year or so are probably about 30% as tariffs weigh on economic activity. Companies must pay some of these levies while the remainder of those costs will be passed on to inflation-weary consumers in the form of higher prices. Some consumers may pull purchases forward ahead of tariffs to avoid price hikes, but others are delaying spending due to the uncertainty, weighing on economic growth. It’s also difficult for companies to commit to capital projects and hiring while they sort through the potential effects of these new tariffs.
If you are looking for any potential positives in the midst of all this uncertainty, it could be that the decline in stocks and the economy could pave the way for more rate cuts from the Federal Reserve. That should help keep borrowing rates contained, which would make credit less expensive and ultimately could relieve pressure on profit margins, allowing stocks the potential to rally from these lows. Additionally, the balance sheet of Corporate America currently remains in good shape and is positioned for solid earnings growth even despite the increase in average U.S. tariff rates.
As we know, the stock market does not like uncertainty, yet historically it does tend to recover once that uncertainty starts to clear. We saw that during the trade war period of 2019 under Trump 1.0. From August 23, 2019, through the pre-pandemic highs on February 19, 2020, the S&P 500 index rallied 19%. That may be too much to ask over the next six months, but a double-digit rally from current levels through year-end does seem attainable.
While the broad U.S. stock market may have fallen during the first quarter, 7 of the 11 S&P equity sectors produced positive returns, hinting that a broadening out of the US market participation is under way. Bonds were higher as well, reminding investors of the benefits of diversification.
Volatility may stay with us for a while as the policy fog continues to cloud the short-term outlook, but we remain focused on longer-term economic indicators (and quarterly earnings) to guide our decision making in the months ahead. Annual returns have historically been muted after first quarter losses, but negative sentiment suggests a durable low may be close.
As always, if you feel that your portfolio is out of alignment with your personal time horizon or risk temperament, please reach reply to this email or book an appointment online by clicking HERE so that we can explore any adjustments that may be warranted.
Sincerely,
Bryan Foronjy and your Team of Wealth Managers
Foronjy Financial
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