Publisher’s Note: Bill Taylor is off this week so you will see a slightly different writing style in this post, but he will return next week with his usual pithy market commentary.
Too quiet? After just three weeks of President Trump’s return to the Oval Office, a whirlwind of executive orders and policy directives have flowed from the White House. These actions, ranging from major tariffs to redefined international agreements, were anticipated to inject volatility into the financial markets. Yet, contrary to expectations, market activity has remained notably muted (did I hear someone say “boring”?).
One of the hallmark actions of President Trump’s early days has been the reinstatement and introduction of tariffs on imports from key trading partners, including Canada, Mexico, and China. A 25% tariff on steel and aluminum imports was swiftly implemented, aiming to bolster domestic industries. While such protectionist measures typically stoke fears of trade wars and inflation (and have in the minds of many media pundits), the markets seemed to barely react to it all.
Why, you wonder? Firstly, investors appear to interpret these tariffs as strategic negotiation tools rather than long-term economic impediments. The perception that these measures are leverage for future trade deals has mitigated immediate concerns. Secondly, the resilience of global supply chains and the adaptability of businesses have lessened the anticipated shock to the system – at least for now.
Inflation also continues to remain a focal point for both policymakers and investors. The Federal Reserve, under Chairman J. Powell, had previously embarked on an aggressive rate-hiking cycle to tame inflation, bringing it down to approximately 3%. However, with the introduction of new tariffs and “expansive” fiscal policies, there are new worries of potential inflationary pressures.
Despite these concerns, J. Powell and his cronies at the Fed have opted for a cautious stance, maintaining current interest rates and signaling a “data-dependent” (which data, you ask?) approach moving forward. The market’s muted response suggests the lack of confidence in the Fed’s ability to navigate this complex landscape, at least from our perspective.
Meanwhile, the equity markets have demonstrated some level of resilience amidst the flurry of executive actions. The S&P 500, for instance, has experienced modest gains, with a 2.8% rise in January. This performance, while not groundbreaking, indicates a level of investor confidence in the underlying strength of the economy and corporate earnings and the “new direction” the American economy is currently taking under the Trump administration.
Several sectors have been particularly noteworthy. Technology stocks, despite facing potential headwinds from trade policies, have maintained their momentum. This is partly due to the global demand for innovation and the sector’s intrinsic adaptability. Additionally, companies with diversified international exposure have managed to offset domestic uncertainties with robust performance in other markets. At least so far.
The current sentiment among investors appears to be one of cautious optimism. While the rapid succession of executive orders introduces elements of uncertainty, the fundamental strengths of the economy provide a counterbalance. Robust employment figures, healthy consumer spending, and resilient corporate earnings contribute to a stable investment environment.
Moreover, the anticipation of potential deregulation and pro-business policies offers a silver lining for many market participants. The prospect of a more business-friendly regulatory landscape fosters an environment conducive to investment and growth, further reinforcing market stability.
As the Trump administration continues to chart its policy course, markets are likely to remain in a state of “vigilant observation”. In this environment, investors need to stay on top of policy developments, economic indicators, and the ever-changing geopolitical events going on.
With so much uncertainty and things changing almost hourly, it might be time to get back to an afternoon nap routine. At least for now.
Yawn.
