Stock Talk - Tariffs: Shock and Awe

Starting point is 00:00:00 Investors, I'm trying to keep this one short as last week was a blur with loads of earnings conference calls in our Oak Carvest first half Market Outlook Summit last Thursday night. Tonight, we're really going to explore 2025 what we expect from a market outlook standpoint. There's a link in the description below to the portion of the event we live streamed over YouTube for clients and online guests. We covered a lot of ground over an hour and a half from interesting stock and bond and currency market topics to ongoing economic events. Of course, a few of the things going on in Washington, D.C., including taxes, tariffs, and immigration, and what those things could mean for a volatility in 2025 and your money. Sure enough, almost on cue around lunchtime Friday, with every other stock market in the world closed,

Starting point is 00:00:44 White House press secretary Carolyn Levitt took to the podium and announced that U.S. President Donald Trump would impose tariffs on Saturday of 25% on Mexico, 25% on Canada, and 10% on China. The president will be implementing tomorrow a 25% of, tariffs on Mexico, 25% tariffs on Canada, and a 10% tariff on China. Later that day, President Trump said that Canadian oil would be hit with a lower tariff of 10%, which could take effect in February. The President also said he planned to impose tariffs on the European Union in the future, saying that those countries had not treated the U.S. very good.

Starting point is 00:01:21 And what did the U.S. stock markets do? The computers, algorithms, and short-term traders took over, and the S&P 500 rolled over in went from up about half a percent to down half a percent in nearly a straight line. Instead of the S&P closing the week at a new weekly all-time high on the back of stronger earnings reports, lower interest rates, and a lower dollar, it closed the week down, and the chartists will likely start talking double-top formations at 6,100. Take a look at the daily five-minute charter in the S&P 500 for last week, with Friday's press conference timing noted, as well as the move down in the cash S&P 500. Take a look at the same daily five-minute chart.

Starting point is 00:01:58 charted the VIX, the Volatility Index for last week, with Friday's press conference timing noted as well, with its move up also noted. Now most will say, but Chris, we already knew that President Trump and his team were talking tough on tariffs. Yes, we did. However, nowhere in the last 48 weeks had the team mentioned China and Europe, and that's the problem. Remember investors, as Charles loves to remind everyone, financial markets are forward-looking. Our financial markets had already adjusted to the notion of some near-term tariffs on Mexico and Canada. However, it had not adjusted to much wider and higher tariffs on other countries.

Starting point is 00:02:34 This is why I titled this week's Stock Talk episode, Shock and Aw. Investors, I don't know if you voted for Donald Trump or Kamala Harris. I don't know if you support his policies or not, and the financial markets don't know, nor do they care. What they care about is consistency and visibility of policies. Most larger companies can plan around the consistency of policy over time. Consumers can also plan around the consistency of policies. We may not like these policies, but we can plan and adjust over time measured in quarters and years.

Starting point is 00:03:04 However, investors, they can't plan around what they see is either random acts or shock and awe. And with the noon press conference, the U.S. stock market sold off and many of the commodity markets that could be affected by the new tariffs rallied. I'm not an expert on tariffs by any stretch of the imagination. However, if you want a great summary of what tariffs in a trade war might mean in a ten- minute read with nine charts and tables, I'll put a link to a tremendous article written by the CFR Council of Foreign Relations on the subject in the description below. Here's one important chart they compiled in the article showing what imports might be most affected. Investors, it's kind of funny. The night before the White House Noon press conference at our Old Carvis Financial

Starting point is 00:03:45 Group's Market Outlook Summit, Troy Sharp, our old Carvis founder, brought up the part of Trump 1.0 presidency that investors deplored but traders loved. Back in the first, first term he would tweet things on a Friday afternoon and I would hear Chris yell from the back of the office like why do you do that why do you say that with some four-letter words mixed in and you see the market he'd trump would tweet something and the market would div about one or two percent that was post 2017 after the administration and moved on from its then sole focus of lowering both corporate and individual tax rates onto tariffs and trades and other policy focuses in

Starting point is 00:04:23 2018 through 2020. Short-term volatility then ruled the day. That was a period of time when I would leave our headquarter office around a 2 p.m. meeting on a Thursday, an hour out from the markets close or walk to the mall to grab lunch on Friday at 11.30. And then with no other markets open in the world, President Trump or someone in the administration would tweet a new policy or a new idea and the stock markets would go from being up 1% to down 1% in a near straight line in the final hour of trading that day. As we previously mentioned, soft landings in the economy don't guarantee no volatility, like the straight lines up for 2017 under Trump 1.0, when the administration had one sole goal for our economy. What was that? Lower taxes. That was their one goal, lower corporate and individual

Starting point is 00:05:11 taxes. This time around, they seem to be going for the early shock and awe, which financial markets don't relish. They're attacking tariffs and immigration hard from the first week. Investors, whether or not you agree with the current administration policies on tariffs and immigration, recent economic data releases have been coming in short of expectations. The economic surprise index is slowing and not rising with smaller business administration expectations for the economy. While that's still good growth, it's slowing. Much as the inflation data in the U.S. tends to be highly seasonal with the year beginning

Starting point is 00:05:44 with higher inflation prints and then slowing throughout time, it's quite normal for the economy to slow post-holidays. As little as I care about government data given its false precision and historically poor accuracy, even that data set is missing. Just last week, it was announced that the fourth quarter, 2024 gross domestic product grew weaker than expected 2.3 percent, quarter over quarter, down from the third quarter's 3.1 percent growth. Compared to the third quarter, the deceleration in real GDP growth in the fourth quarter primarily reflected downturns in investment and in exports. Investors, those are two categories you don't want to see slowing as an investor.

Starting point is 00:06:26 One can see that the economy is slowing in the real-time, real interest rate chart. Take a look at the two-year real interest rate chart. Down and to the right is okay, but it means growth expectations are slowing and the risk of an economic shock is increasing. When I look at this chart, which is real-time data, I see the Fed is looking in the wrong direction. I see the Fed is too intent on looking at at the government inflation data which lags and not intent enough at looking at real-time growth and demand data reflected in real interest rates. I see a Fed that is too tight, but they do have room to cut rates over 2025. Investors, getting back to the topics of tariffs and immigration and their effects on the financial markets, they tariffs, that is, are taxes plain and simple.

Starting point is 00:07:12 And while there is much current debate on whether tariffs are inflationary or not, whether they hurt financial markets or stocks or not, I know of one thing much bigger than a tariff, a tax, or a price hike that will hurt and tank a stock. What's that? It's lower unit demand caused by higher prices or removing a consumer from the demand picture, whether it's a tariff or just too many price hikes. That's just math and how marginal return on invested capital works. If these tariffs or other Trump administration policies hurt aggregate and unit demand, the soft landing will get very rocky, very quickly. Real interest rates will continue to move lower.

Starting point is 00:07:50 A third year of decent stock gains in 2025, a soft landing not so softly as we titled our outlook, could get very turbulent, very quickly, and stocks would be in for a choppier ride in the first half. We shall see. Historically speaking, higher volatility out of the gate, like we experienced in the first two weeks of January, does not mean that the bull market in U.S. equities is over,

Starting point is 00:08:13 where that 2025 can't be the third year in a row of healthy investor gains in U.S. stocks. Seasonally, February does tend to be a lower return and higher volatility month for equities, and maybe the tariff actions are this year's excuse. I don't know, but I know that regardless of the path for the economy and financial markets in 2025, the investment team in Oak Harvest Financial Group will be here, manning the ship and adjusting our models where we can and when we think we need to. We expect 2025 to be quite an active year for active stock management. We hope that you joined us last week for our first half market outlook.

Starting point is 00:08:49 Once again, the link for the replay is in the description below. Feel free to pass it on to anyone who might find it educational. Until next week, when earnings reports and conference calls slow and stock buybacks begin to ramp in earnest, have a blessed weekend. All content contained with an Oak Harvest podcast expresses the views of the speaker and is for informational purposes only. It is based on information believed to be reliable when created, but any cited data, indicators, statistics, or other sources are not guaranteed.

Starting point is 00:09:19 The views and opinions expressed herein may change without notice. Strategies and ideas discussed may not be right for you, and nothing in this podcast should be considered as personalized investment, tax or legal advice, or an offer or solicitation to buy or sell securities. Indexes such as the S&P 500 are not available for direct investment and your investment results may differ when compared to an index. Specific portfolio actions or strategies discussed will not apply to all client portfolios. Investing involves the risk of loss and past performance is not indicative of future results.

Stock Talk - Tariffs: Shock and Awe

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