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WEEK AHEAD
Feb 10-14, 2025
Our tactical models navigated last week’s anticipated volatility with resilience, emerging largely unscathed. They remain fully allocated and strategically balanced, reflecting a steadfast commitment to market exposure. However, heightened geopolitical tensions have injected a degree of sentiment uncertainty, warranting close monitoring for potential risk recalibration if uncertainty remains.
Last Week's Markets Weather Tariff Turmoil
President Trump's geopolitical strategy is leaving Democratic pundits flustered, yet he marches on undeterred—much like Matthew Wilder's 80's one-hit wonder: "Ain't nothin' gonna break my stride, nobody gonna slow me down. Oh no, I got to keep on moving." Somewhere, you can almost hear President Reagan chuckling, "Well, there you go again," as Trump shrugs off the critics and keeps pressing forward.
Investors braced for impact after President Trump's last weekend tariff announcement, but the storm had largely subsided by Monday's opening bell. The White House pressed pause on its proposed 25% tariffs on Mexican and Canadian imports for a month, following concessions from both nations. Markets, largely unfazed by the political brinkmanship, ended the week on a subdued note, with the S&P 500 slipping a modest 0.23%.
As the Federal Reserve held rates steady at its January 29 meeting, bond markets took notice. Long-term yields compressed, flattening the curve and lifting the Bloomberg U.S. Aggregate Bond Index by 0.39%. The 10-year and 30-year Treasury yields fell by 9 and 14 basis points to 4.49% and 4.69%, respectively.
On the economic front, the latest jobs report sent mixed signals. Payroll gains came in lighter than expected, but wage growth and a declining unemployment rate underscored continued labor market resilience:
Yet, signs of a manufacturing slowdown continue to emerge:
Earnings: Big Tech's AI Spending Spree Spooks Investors
Fourth-quarter earnings painted a mixed picture, with AI spending plans rattling some of Tech's biggest names:
Looking Ahead: Tariffs, Powell, and Key Economic Data
Volatility is likely to persist as Trump's tariff maneuvers dominate the headlines. The market will also be watching for policy clues from Fed Chair Jerome Powell's testimony on Tuesday, the latest CPI inflation print on Wednesday, and the Industrial Production report on Friday. With trade negotiations still in flux with the rise of so-called reciprocal tariffs, investors remain on edge, awaiting clarity on both near-term disruptions and the long-term economic fallout.
"A news conference but probably reciprocal tariffs where a country pays so much or charges us so much and we do the same so very reciprocal because I think that's the only fair way to do it that way. Nobody's hurt they charge us we charge them it's the same thing and I seem to be going in that line as opposed to a flat fee tariff."
– President Trump, February 7, 2025
Last Week's Last Saturday, the President confirmed that he would subject Mexican and Canadian goods to the full 25% tariff - and Chinese imports to 10%.
However, Canadian energy, including oil, natural gas, and electricity, will be taxed at a 10% rate. The levies will take effect on Tuesday.
What effect will this have?
The first impact will be increased volatility and a move down in various asset classes.
Despite repeatedly stating that he planned to introduce tariffs, various asset markets appear to have convinced themselves that this was a bluff. So, we expect to see downward pressure as bulls are forced to reassess. We saw an initial selloff in European and Japanese stocks.
Bloomberg: Foreign stocks are selling off.
I
t should also cause the USD to rally as the inflation concerns, plus a potential reduction in trade, will reduce the outflow of USDs.
Bloomberg: The USD is rallying, as expected.
So, this will likely cause the market to reprice rate cuts and potentially steepen the curve.
The case for foreign bonds is more straightforward. The global economy is weak, and they are looking at a recession. Hence, we expect them to rally, which is how the market has opened.
All of this should pull capital back to the U.S.
Further thoughts
Our team sitting in London always thought something like this was inevitable. Ultimately, the U.S. twin deficits (fiscal and trade) are unsustainable and were always likely to close. However, this process is rarely pretty.
That said, the big - and strangest - surprise is that energy imports are within scope. The U.S. remains an importer of specific oil grades, with Canada accounting for approximately 60% of this.
U.S. refineries are geared to process Canadian oil. Outside of this, the two main exporters are Mexico and Venezuela.
So, this element is a straight tax on U.S. consumers for no apparent benefit.
However, Trump has repeatedly said he wants a U.S. manufacturing renaissance. Pushing up input costs, especially energy, making exports more expensive, and reducing U.S. households' real incomes seems an odd way to start. Ironically, the new Treasury Secretary made this point a year ago whilst still a private citizen.
Also, this is likely to be inflationary. Whether it is transitory or it causes broader issues remains to be seen. More importantly, it breaks a key campaign issue to bring inflation down.
Bloomberg: The bond market is starting to price rising inflation.
The final question is whether this will trigger a trade war. It remains to be seen, but as the world's largest economy and with a considerable trade deficit, the U.S. has many more chips to play than most other countries.
In the long term, it will be difficult to push some of your trade partners into a recession and expect them to increase spending on items like defense.
Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.