Now seems like a good time to assess what has happened and to parse out what is coming. The stock market has shown that a lot of market participants were either caught off guard, panicked, or some combination of both.  True, the market was starting from an overvalued  position (read: expensive valuation) but even at this point, many find it difficult to assess future earnings. Hopefully,  this memo will help you do that. Apologies in advance for the length. Please stay with it. 

The new administration has a handful of priorities, each of which are radical departures. What must be understood is their level of belief in these issues and more so,  that this administration believes the country is at an inflection point – either fix the problems or it will continue to slide toward calamity. So, public opinion polls? Mostly irrelevant now, though will gain in importance next year as we get closer to the midterm elections.

What are the primary strategic directives?

1. Tariffs – initially allowed after WWII as “enlightened self-interest” have over-stayed that rationale and now simply fleece the US
2. Deficit Spending – running deficits that exceed the nominal ($) growth of our economy (GDP) cannot continue
3. The US Government is bloated as exhibited by many agencies having grown past their original, legislatively established mandates.
4. Current tax structures need to be made permanent.
5. The “world order” needs to be remade – with the US, Russia and India the power centers, and with the objective of isolating China. The US must become self-sufficient in manufacturing, and specifically all things tech, healthcare, critical materials, and transforming the tech advancement of our military.

Apart from these strategic objectives, there is also a list that can be called “mindsets”:

1. Only have four years to make all this happen
2. Efficiency tactics will be “corporate” in style- and hence immediate – versus having any political process.
3. Trade negotiations involve one person, but have two goals: the cost of trade, and geo-politics
4. Primary tactic is “escalate to de-escalate”
5. All meaningful negotiations occur only in the proverbial “back room”…
6. Economic stress will occur in 2025- and worth it.
7. Foreign aid won’t stop, but will have clear “return on investment” criterion
8. Our government has presided over the deteriorating health of our population. Reversing that also helps blunt future Medicare/Medicaid spending.
9. Trump survived an assassination by less than an inch. Nothing focuses the mind and serves as a reminder of what he believes he must do, as being that very close…

So….how to read all this and what to do. It is very clear that President Trump wants to fundamentally change the direction of the country. He revels in the “wheeling and dealing”. Although most negotiations will take longer than boasted, and though he may not get all he wants, the objectives will be substantially achieved.

So…what to do. We are certainly in for more “bumpy” markets.  Here is the setup: based on the existing tariff threats,  the basic direction of the economy is down. Tariffs are a tax, trade agreements are notoriously complicated, and all this is happening when the boost provided by US Government spending is leveling-off or even declining.

Some trade negotiations are happening. To market participants, this presents the huge risk of being out of the market when a “deal” is announced that (in perception) relieves the downward pressure. Fearless forecast: the US and India (the biggest offender) come to an agreement to 1) reduce/eliminate all tariffs, 2) eliminate administrative roadblocks on US manufacturers to India’s markets,  3) India agrees to purchase X amount of agriculture goods, planes and defense-related hardware,  and 4) India agrees to block Chinese companies from exporting (transshipping) to the US.  

View this as a “template” that now 130 countries can follow and line up accordingly. If/when  this happens, it’s very positive and likely a very big “upside” risk to the stock market.

But note: the China element of the trade issue will remain. China is special to this administration: they view China as an enemy despite what they say. And frankly,  China doesn’t care. They are going in their direction regardless of what the world thinks. Indeed, they  manufacture too many essentials, from widgets to needed rare earths, to be anything but amused right now. To be sure, China does have serious economic and demographic issues going on and they have not shown any ability to resolve them. The Trump administration seeks to “contain” China, but their end game strategy has never been articulated. To what end? Indeed, market commentators offer no speculations, either. Hard to add any clarity on this issue right now.

Also factoring in is the “big, beautiful tax bill”.  The easy part is maintaining the existing tax brackets, and adding the tax relief elements usually discussed: SALT, no taxes on Social Security or tips, etc. The key question is will the trend of the US Government deficit spending shrink. This is a major inflection point: we need to get on the path of lower deficits.  

But note a dilemma:  whatever is agreed upon affects the 2026 economy, so potentially affects the midterm elections. Politics would thus argue that any deficit “progress” will be mild, a wager that the bond markets might not penalize for now.  Fingers crossed.

Right now,  not much “hard” data has shown up revealing an economic effect from any of the policy issues discussed above. There is plenty of “soft” data – meaning opinions. An early response has been to “front-run” the tariffs - order a bit more inventory or buy before prices go up. We’re seeing that in the economic or “hard” data now. The straws in the winds, however, point to something more dramatic: a “sudden stop” in economic activity as people throughout the economy simply stop and wait to see what the resolution will be.  Human nature to be sure, but a clear and negative economic effect.

An easy timeline is shipping goods from China. It takes several weeks for those big container ships to cross. We can track them and the traffic at Los Angeles is already slowing down.   May 10 or so is when the flow of cheap goods really stops on the west coast, and then a few weeks later in Chicago and New York City. Shelves will start looking empty.

Already, if the goods are made in China, Temu, Shein and others have instituted tariff-labelled price boosts. Viewed in the basic economic study of supply/demand, higher prices mean less sold. This will now be happening broadly to Chinese made goods.

Many US companies got on the supply chain re-imagining bandwagon years ago, during Trump 1.0. That meant moving out of China to places like Vietnam, Malaysia, and yes, India. Their prices will likely be on hold until July 9^th… and perhaps even a non-issue if a trade deal/trade deal template is announced. Net, the big tariff boosts are primarily isolated to goods sourced in China as of now.

We are moving into a period of seeing the actual consequences of policy actions – so getting hard data. Earlier market gyrations were based primarily on perceptions.  After the wild swings in early April,  stocks markets have settled at down about 9% from the late February peak. Share prices are still trading at a high P/E ratio though (approx. 21x) and forward earnings have not declined all that much. It can be said that there is an act of faith going on: that the eventual resolution to the trade and budget issues, though difficult, will have our country headed in the right direction and on a better footing financially. That is also President Trump’s sincere belief.

But getting there will not be a straight line. Did the recent market violence reflect the lows of the cycle? As mentioned, earning estimates have only come down slightly – more declines are likely. Will there be opportunities to catch low prices again? Negotiations such as trade or diplomacy are sometimes a game of chicken or an exercise in escalate to de-escalate. Those types of scenarios likely imply another round of lower stock prices. So would weakening employment (implies GDP turning negative) which would also be met with an aggressive lowering of interest rates by the Federal Reserve. Were stocks to return to near the level of 4,800 on the S&P 500 index, get active buying.

Don’t forget “upside risk” previously mentioned – a trade deal is announced and the market streaks upwards. It is easy to “logic out” all of these potential scenarios. We just don’t know the discussions going on in the back room nor can we predict the timeline.  We can extrapolate, but to use vernacular, we have a market fraught with “headline” risk. That can reverse the best of reasoned out scenarios.

For our clients that were holding strategic cash, we deployed most of it earlier in April.  Were the stock market to work higher from here we’d say let’s discuss again tactically raising some cash. Either way, the exercise now is to identify how we want to eventually position the investment portfolio.  That is a fun exercise and helps to structure the decision-making during these fluid times.

Any questions? Just call.