Tariffs: Shock and Awe

I’m trying to keep this one short as last week was a blur with loads of earnings calls and Oak Harvests first half market summit last Thursday night.  There’s a link in the description below to the portion of the event we livestreamed over YouTube for clients and one-line guests. We covered a lot of ground over an hour and a half from interesting stock, bond, and currency market topics to ongoing economic events and of course a few of the things going on in Washington DC, including taxes, tariffs and immigration and what those things could mean for volatility in 2025 and your money.

And sure enough, almost on cue, around lunch time Friday, with every other stock market in the world closed, White House press secretary Karoline Leavitt, took to the podium and announced the US President Donald Trump will impose tariffs on Saturday of 25% on Mexico, 25% on Canada and 10% on China. Later Friday, President Trump said that Canadian oil would be hit with lower tariffs of 10%, which could take effect later in February. The President also said he planned to impose tariffs on the European Union in the future, saying those countries had not treated the US well.

And what did the US stock markets do, the computers, algorithms, and short term traders took over and the SP500 rolled over and went from up about +.5% to down -.5% in nearly a straight line and instead the S&P500 closing the week at a new weekly ATH on the back of strong earnings reports, lower interest rate yields, and a lower dollar, it closed the week down and chartists will likely start talking “Double top formations at 6100”.

Heres’ the Daily, 5-minute chart of the SP500 for last week with Friday’s press conference timing noted as well as the move down in the cash SP500.

And here’s the same Daily, 5-minute chart of the Vix, volatility index for last week with Friday’s press conference timing noted as well, with its move up also noted.

Now most will say, but Chris we already knew that President Trump and his team was talking tough on Tariffs. Yes, we did, however, nowhere in the last 4-8 weeks had their team mentioned China and Europe.  And that’s the problem.  Remember investors, as Charles loves to remind everyone, financial markets are forward looking.  Our financial markets had already adjusted to the notion of some near-term tariffs on Mexico and Canada; however it had not adjusted to much wider tariffs on other countries.

This is why I titled this week’s episode, Shock and awe.  Investors, I don’t know if you voted for Donald Trump or Kamala Harris, I don’t know if you support his policies or not, and the financial markets don’t know either, or do they care either.  What they care about is consistency and visibility of policies.  Most larger Companies can plan around consistency of policy over time.  Consumers can also plan around consistency of policy. We may not like those policies, but we can plan and adjust over time measured in quarters and years. However, they can’t plan around what they see as either random acts or “shock and awe.” And with that noon press conference, the US stock markets sold off and many commodity markets that could be affected by the new tariff policies rallied.

I am not an expert on tariffs by any stretch of imagination.   However, if you want a great summary of what tariffs and a trade war might mean in 10 minutes read with 9 charts and tables, here’s a link to a tremendous article written by the CFR, Council of Foreign Relations, on the subject. https://www.cfr.org/article/what-trumps-trade-war-would-mean-nine-charts?utm_source=substack&utm_medium=email

Here is just one important chart they compiled in the article showing what imports might be most affected.

Investors just the night before the White Houses noon press conference, at our OHFG market outlook summit, Troy Sharp, our OHFG founder, brought up the part of Trump 1.0’s presidency that investors deplored but traders loved.  That was post 2017.  After the administration had moved on from its sole focus then of lowering both corporate and individual tax rates, onto tariffs and trade and other policy focuses, in 2018-2020, short term volatility ruled the day.

That was a period of time when I would leave our HQ office for a 2PM meeting on Thursday an hour out from the markets close, or walk to the mall to grab lunch on Friday at 11:30AM, and then with no other markets in the world open, President Trump or someone in the  administration would Tweet a new policy or idea, and the stock markets would go from being up 1% to down -1% in a near straight line in the final hour our hours of trading that day.

As we previously mentioned, soft landings in the economy do NOT guarantee no volatility, like the straight lines up for 2017 under Trump 1.0, when the administration had one sole goal for our economy, lower taxes.  That was their one stated goal.  Lower corporate and individual taxes.  This time around they seem to be going for the early, “shock and awe”, which financial markets do NOT relish.  They are attacking tarriffs and immigration hard from the first week.

Investors, whether you agree with the current administration policies on tariffs, immigration, recent economic data releases have been coming in short of expectations. The economic surprise index is slowing and not rising with smaller business administration expectations for the economy. While that’s still good growth, it’s slowing.  Much as inflation data in the US tends to be highly seasonal with the year beginning with higher inflation prints and then slowing throughout time, it is quite normal for the economy to slow post holidays.  As little as I care about government data, given its false precision and historically poor accuracy, even that data set is missing. Just last week, it was announced that in the fourth quarter 2024 Gross Domestic Product (GDP) grew a weaker-than-expected 2.3% quarter-over-quarter (q/q), down from the third quarter’s 3.1% growth.  Compared to the third quarter, the deceleration in real GDP in the fourth quarter primarily reflected downturns in investment and exports.  Investors, those are two categories you do not want to see slowing as an investor.

One can see that the economy is slowing in the real-time real-interest rate chart.  Here’s the chart of the 2-year real interest rate.

Down and to the right is “ok”, but it means growth expectations are slowing and the risk to an economic shock is increasing.  When I look at this chart, which is real time data, I see a Fed that is looking in the wrong direction.  I see a Fed that is to intent at looking at government inflation data, which lags, and not intent enough at looking at real time growth and demand data reflected in real interest rates.  I see a Fed that is too tight but does have room to cut rates over 2025.

Investors, getting back to the topic of tariffs and imigration and their effects on financial markets.  They, tariffs that is, are taxes, plain and simple. And while there is much current debate about whether tariffs are inflationary or not, whether they hurt financial markets and stocks or not, I know one thing much bigger than a tariff, a tax or a price hike that will hurt and tank a stock?  What’s that? It’s lower unit demand caused by a higher prices or removing a consumer from the demand picture, whether it’s a tariff or just too many price hikes.  That’s just math and how marginal ROIC works.

Investors, if these tariffs or other Trump administration policies hurt aggregate end unit demand, the soft landing will get very rocky, very quickly.  Real interest rates will continue to move lower.  A 3^rd year of decent stock gains in “2025, a soft landing, not so softly” as we titled our outlook, could get very turbulent very quickly and stocks would be in for even choppier rides in the first half.  We shall see.

Historically speaking, higher volatility out of the gate like we had the first two weeks in January does not mean that the bull market in US equities is over or that 2025 cannot be the third year in a row of healthy investor gains in US stocks.  Seasonally, February does tend to be a lower return and higher volatility month for equities, and maybe the tariff actions are this year’s excuse. I don’t know.  But know that regardless of the path for the economy and financial markets in 2025, the investment team at OHFG will be here manning the ship and adjusting our models and long/short hedge equity fund where we can and when we think we need to.  We expect 2025 to be quite and active year for active stock management.

We hope that you joined us last night for our first half market outlook. Once again here’s the link for the reply and feel free to pass it on to anyone who might find it educational.  Until next week, when earnings reports and conference calls slow and stock buybacks begin to ramp again in earnest, have a blessed weekend.