This week’s big news is still Trump’s tariff regime — the ongoing questions of who/what is included and who/what is excluded. The Trump administration announced a 90-day pause last week on tariffs to all countries except China, with whom the US tariff rate now stands around 130%. There are some limited exceptions (including smartphones and some electronics). China, of course, responded with sweeping tariffs on US-made goods.
If global tariffs do end up being rolled back, that will be an overall good for the US economy. On our current course (and, admittedly, that course changes almost daily), with our current tariff rate on China I see the US slipping into a recession, but not as bad a one as I feared last week.
In other news, earnings season as begun. Investors will be digesting reports over the next couple of weeks. In particular, there will be many quesitons about the new trade regime the Trump administration is pursuing. Earnings are expected to grow about 10% over this time last year (which is good growth — a lone bright spot among the bad economic data), but outlooks will be scrutinized closely. If investors are unconvinced this growth can continue, I expect to see markets deteriorate further (though less suddenly than last week).
Lastly, there is the economic data to consider. On the upside, inflation posted slightly lower than expected. If that holds, we may see a Fed more able to deal with a downturn. This week, we will see retail sales (an important figure!) and industrial production.
Overall, I am reinforcing my view that a recession is likely this year. It probably has not already begun as earnings contractions are a hallmark of recessionary environments. That said, markets tend to anticipate recessions by 3 to 6 months. As I mentioned last week, now is the time to talk to a financial advisor about preparing your portfolio for a recession.
Chart of the Week
This week’s chart (from Fathom Consulting) demonstrates the hand-wringing over the Trump Administration’s new tariff regime. As the chart shows, the effective tariff rate is moving from just under 5% to over 30% — a significant increase. Tariffs increase the price of goods. Some of that increase is absorbed by the importing business (lowering profits, bad for investors), and some of it is passed along to consumers (bad for consumer spending, which is about 75% of the US economy). While others can debate the merits of the tradeoffs involved, investors need to be aware of the change in the bottom line of businesses and the economy!
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