Economists Have Been Wrong About How Trump Will Handle Tariffs
Trump continues to drive the market higher, but watch for rotation into small-caps.
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President Trump's positive comments about the strength of the economy at the World Economic Forum on Thursday helped drive the S&P 500 to a new all-time high. Early in the day, the market looked ready for a rest, but Trump's aggressive comments about interest rates, cryptocurrencies, and growth policies attracted a new round of buying. Trump has also tempered his comments about imposing tariffs and said that he would rather not have to use them against China.
The market is digesting gains early on Friday morning, but Bitcoin IBIT is bouncing back after some "sell the news" action, and the Magnificent Seven MAGS names are attracting interest after underperforming on Thursday.
The market is at a tricky juncture as it is becoming increasingly extended as it reacts to positive news. While the major worry recently has been tariffs, that seems to be subsiding. Many economists have wrongfully predicted that Trump would just impose tariffs across the board, but he is using the threat of tariffs as a negotiating tool and is already producing some positive results. The fear of tariffs seems to me to be driven more by political bias than reality.
The most positive aspect of Thursday's action was the small-cap outperformance. There is a greater focus on stock picking, which helps smaller stocks that are not expensive or technically extended. The biotechnology sector had one of its best days in a long time on Thursday as traders started to bottom fish more aggressively.
The key question right now is whether the interest in stock picking stays elevated as we move deeper into earning season. Typically, earnings season is when the merits of individual stocks are considered more carefully, and there are big winners and losers. That offers more opportunities for speculative traders.
The indexes are a bit extended, but there is also an inclination to rotate into small stocks. Rotation is the best way for the market to correct, so keep an eye on the Russell 2000 IWM. As long as there is relative strength, then market conditions will be favorable for traders.
At the time of publication, Rev Shark had no positions in any securities mentioned.
