Market Thoughts: Is everything going to be alright?

‘Everything’s going to be alright’ is the current market mantra. Better than feared seems more accurate. It comes down to a resilient, though cooling, macro landscape. It doesn’t hurt that strong earnings across ‘big tech’ continue to anchor animal spirits. Markets hit reset. So where do we go from here?

Sentiment’s wobbly, but sprite. Investors, for the most part, want to believe. I don’t need to hear about another White House taco. Having lived and worked in Mexico City after grad school, I love a tasty taco al pastor.

As I mentioned at the start of the tariff joust in April, Washington’s opening offer was meant to be absurdly incendiary. It certainly captured attention. That was the point. It anchored high to negotiate down to a level that had the White House started with would have seemed unfathomable.

If I told you in late March the U.S. was about to increase tariffs by 4-5x, markets would similarly have rioted. They would not have recovered as quickly. As Washington navigates landing tariffs, investor nerves are calming. It’s been quite a game of chicken. The operative question: who’s chickening out? It may simply come down to exhaustion. The art of the deal.

We have July 9th to get through. It’s the next tariff demarcation line for Europe before 50% reciprocal tariffs roll back in like thunder (apologies to Bob Dylan). We also need to know where the doubling of tariffs on steel and aluminum imports land. Should they stick at 50% it will be painful to U.S. industry.

China seems to be digging in, Europe rumbling retaliation. Where tariffs ultimately land with the European Union and China will set the stage for where the globalization and supply chain kerfuffle takes us. Also, the global economy.

Negotiations away from “the big two” are noise as it relates to markets. Nasty—specifically for emerging economies—but less impacting at a global macro level. It’s why the White House didn’t start with the European Union and China. They engaged the U.K. instead, the Special Relationship.

Risk of recession is circling, but it’s not a foregone conclusion. Stagflation is a more likely outcome the longer this drags out. That point is keenly understood in Washington, they get the joke. Midterm election prep has already begun. “It’s the economy stupid.”

With U.S. equity markets having bounced back into positive territory, I think traders would be grateful to put down the sticks and stones they’ve been throwing at each another. The thing weighing most on investors? Not knowing which headline to believe, let alone chase.

I’d advise not chasing unless your passion is trading. What’s a long-term investor to do? Hold steady. Don’t race after risk, markets are expensive. The outlook’s uncertain. In particular, for where Congress lands on the budget and deficit.

I know… uninspiring. Investor adrenaline generally comes from someone screaming ‘do something.’ Choosing to hold your ground is doing something. Chasing chickens sounds like bad distraction. Similar to doom scrolling headline hustling hysterics.

The Congressional Budget Office (CBO) released its estimate on the cost of the proposed White House budget. They expect it to increase the deficit, netting out spending cuts and tax breaks, by $2.4 trillion over the next decade. Private sector estimates continue to range between $3-5 trillion.

CBO also released their estimate for how much tariffs, as of May, would raise in revenue over a decade… $2.8 trillion. Interesting. I’ve never been a big believer in coincidence. Political expediency I appreciate, in a Monty Python sort of way.

Some of the CBO math comes down to how hard it is to put an estimate on an ever moving target. The CBO numbers will help support the current budget as it works its way through the Senate. Not to mention add to the narrative that tariffs are revenue accretive. They are, at a cost to growth.

In portfolios, we’ve held the line on equity risk along with an overweight to credit. Given the market bounce, we find ourselves overweight equities. We’re pulling that overweight back to neutral. I’m holding on to our underweight in Europe. Everyone’s a hater until they see big tech earnings, then U.S. exceptionalism somehow works its way back into the narrative. As it has—and will—again.

I don’t believe if the U.S. economy breaks the rest of the world sails by unscathed. U.S. assets are over owned, the dollar as well. Like trimming back our equity overweight in portfolios, I expect investors will continue to trim U.S. assets. In particular as they’ve now bounced back.

Like “Trump tacos” I don’t believe “Sell America” is a lasting thing. They are trades that may have legs to them. U.S. markets were overbought, the outlook is less certain. The rules of trade engagement are being re-written. The U.S. continues to offer the deepest capital markets globally. That said, valuation levels matter more than ever.

Is everything going to be alright? Eventually. It’s a question of how we get there… and when.