The prevailing wisdom is that the markets are always right. I take the opposite position. I assume that markets are always wrong. – George Soros
This has been a short week for me due to Austria’s “Labor Day” on May 1, so the Weekly Wintersberger was written on Wednesday instead of the usual Thursday. With little significant news altering my market views, I thought I’d share some thoughts and intriguing findings from this week.
While I’m not overly bullish on the stock market, I’d speculate there’s a chance the recent rally could persist in the short term. My reasoning? Q1 earnings have generally been solid, and the Trump administration may soon offer bullish remarks on potential trade deals.
That said, I’ve spent a few hours this week reflecting on whether the April lows might mark a turning point for markets. I revisited an analogy I had drawn between the aftermath of Liberation Day and the government lockdowns during the 2020 pandemic.
Apollo released a compelling presentation titled "How are US consumers and firms responding to tariffs." The report reinforces my sense that tariffs, much like the 2020 restrictions, are a self-inflicted wound, sowing turmoil, confusion, and uncertainty in the shipping industry and consumer markets. Anecdotes in Apollo’s report echo the anxieties of the pandemic’s early days.
Apollo’s timeline suggests a similar, though slightly extended, disruption compared to the 2020 shutdown. They predict that container ships will stall in May, which will curtail trucking demand and lead to layoffs in the trucking industry by late May or early June, ultimately triggering a recession.
There’s a saying that the stock market is the most critical leading indicator. If we accept this, the recent sell-off could reflect market participants pricing in the disruptions tariffs might cause, akin to the 2020 crash.
With markets now rebounding from their lows, the bull case might hinge on trade deals in the coming weeks that spark optimism in the US, boosting economic metrics again in Q3 while negative data dominates Q2. Apollo’s chart pack supports this view.
Much like in 2020, manufacturing surveys signal worsening pessimism, with new orders, capital expenditure, and trucking plans collapsing, while inventories and prices paid rise, suggesting front-running in anticipation of government actions. This points to a likely halt or contraction in GDP growth in the near term.
Compared to 2020, the stock market began recovering by late March, while the ISM Manufacturing PMI hit its bottom two months later, in May. So, despite likely disappointing Q2 economic indicators, bulls may anticipate a continued stock market recovery.
Spinning this further, the bull-case narrative could look like this: Trump’s Liberation Day rhetoric shocked markets, and the stock market swiftly priced in that scenario. But recent statements from administration officials suggest a calming of tensions, with more trade deals expected to be announced in the coming weeks.
Some analysts also expect a Fed rate cut, driven by short-term economic weakening. This could amplify the investment boost from Trump’s trade negotiations by lowering capital costs, complementing tax cuts, and reducing government spending more moderately than initially feared.
The stock market would quickly price in this “speedy Trump recovery” scenario, with the economy rebounding in Q3 or Q4, which would push stocks to new all-time highs. A final trade agreement with China would be another significant catalyst.
In this thought experiment, short- and long-term interest rates might initially decline before the long end rises later in the year as long-term growth expectations recover.
To wrap up this scenario, stocks may remain volatile in Q2 and possibly Q3, but sharper declines could offer buying opportunities for long-term investors seeking lower entry points.
To be clear, I’m skeptical this scenario will fully materialize. Obstacles remain, including China’s hard-line stance and trade negotiations with other countries that appear less advanced than the Trump administration claims. Still, I thought this thought experiment was worth sharing. Additionally, The Economist has recently published “contrarian” covers predicting a decline in the US.
A chart from Tier1Alpha, showing S&P 500 bear markets from peak to trough, suggests that in a bear market, stocks could fall much further. Of course, like Chart 1, such charts can be crafted to fit a narrative.
Another point: equity bulls likely need a stronger dollar, which isn’t happening yet. EUR/USD remains stuck in a tight range between 1.13 and 1.15.
What else caught my eye this week? A Bank of America chart debunking the notion that US Treasuries have lost their safe-haven status or that demand for US government bonds is waning. It shows US Treasury funds enjoying their strongest four-week inflows since March 2023.
Indeed, global demand for Treasuries is robust. Recent data on foreign holdings of US Treasury securities show a 10% increase. I’ll reiterate: the dollar will remain the world’s reserve currency in the near term because no viable alternative exists.
Before wrapping up, let’s touch on Europe, where the ECB offers a different perspective on the impact of tariffs on consumer prices. Unlike the Bank of England and the Fed, which lean toward tariffs being inflationary, the ECB argues they could be disinflationary.
Recent statements from ECB officials, including Piero Cipollone, head of the Italian central bank, suggest tariffs may have disinflationary effects in the euro area, where real rates have risen and the euro has appreciated following US tariff announcements:
The short to medium-term effects may even prove disinflationary for the euro area, where real rates have increased and the euro has appreciated following US tariff announcements.
Given ECB President Christine Lagarde’s recent comments about the uncertain environment and repeated economic shocks, the ECB’s confidence in disinflationary effects seems bold. Meanwhile, the latest ECB consumer survey shows that consumers expect price increases, possibly due to concerns about US inflation linked to tariffs. Curiously, the ECB remains so sure despite its usual focus on expectations.
In the US, expectations point to a potential combination of stagflation. Recent regional surveys show raw material and finished goods prices above average. While respondents plan to pass costs to consumers, 38% in the Dallas Fed survey noted that doing so is increasingly complex. This suggests consumers are losing purchasing power, and further price hikes may reduce demand. If consumers can’t pay, sellers can’t charge.
Regardless of how these dynamics unfold, the bottom line is that possibilities abound, markets will swing between optimism and pessimism, and uncertainty reigns. No matter which scenario you favor, only time will tell if you’re “Happy?” with the outcome.
Peel me from the skin, tear me from the rind
Does it make you happy now?
Tear meat from the bone, tear me from myself
Are you feeling happy now?Mudvayne – Happy?
Have a great weekend!
Fabian Wintersberger
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All my posts and opinions are purely personal and do not represent the views of any individuals, institutions, or organizations I may be or have been affiliated with, whether professionally or personally. They do not constitute investment advice, and my perspective may change over time in response to evolving facts. IT IS STRONGLY RECOMMENDED TO SEEK INDEPENDENT ADVICE AND CONDUCT YOUR OWN RESEARCH BEFORE MAKING INVESTMENT DECISIONS.