It's Time for Increased Caution as Tariff Reduction Rally Loses Traction
Here's the primary danger now that climbing the wall of worry loses its appeal.
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After recovering from Moody's downgrade of U.S. debt, the market has been stalling and starting to roll over. The primary problems are increased interest rates worldwide and a weaker dollar.
There has been talk for a while about a rotation out of U.S. assets, in large part because of the chaos created by tariffs. During the first quarter of 2025, hedge funds reduced their holdings of the Magnificent Seven MAGS stocks and increased investment in Chinese stocks listed on U.S. exchanges.
A contributing factor to higher rates and a weaker dollar is the tax and spending bill that Congress is attempting to pass. This bill is expected to increase budget deficits by about $3 trillion over the next decade and is not the fiscally hawkish message that many Republicans want to send.
The primary driving force for the recent market advance has been the temporary reduction and delay of tariffs, but there is growing concern that the tariffs that remain will soon start impacting the economy. The market has been ignoring this issue as it has ridden a robust bounce, but the anticipation of negative economic data is building.
Market action has been a peculiar mix of strong upside momentum and a high level of economic pessimism. The bulls have been able to take control of the action as shorts are squeezed and the indexes climb a wall of worry.
The primary danger is that the economic pessimists will start to find data and news that back their views. The poor action in bonds, higher interest rates, and a weak dollar are giving the bears some ammunition, but the technical action has stayed strong. There's a slight deterioration developing now, and we saw strong dip buying on the Moody’s downgrade, but the stalling action is building, and there isn’t any strong news, such as further reductions of tariffs, on the horizon.
It is time for increased caution as the tariff reduction rally starts to lose momentum.
At the time of publication, Rev Shark had no positions in any securities mentioned.
