New Tariffs Spook the Market but U.S. Economy Has Bigger Issues
Donald Trump's imposition of tariffs on China, Canada and Mexico spiked volatility but there are even bigger reasons to be bearish.
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Implementation of new tariffs on China, Canada and Mexico, along with the retaliatory measures those countries took against the U.S., spiked volatility in the markets yet again on Tuesday.
The S&P VIX Index (VIX) briefly broached the 25 level for the first time in 2025. Equities did manage to rebound somewhat late in the day, especially the NASDAQ. News from tariff wars will continue to dominate financial headlines in the weeks ahead with "reciprocal" tariffs scheduled to go into effect in early April. Investors also will have to navigate a fast-approaching clash around raising the debt ceiling yet again, which has the potential to provide some additional headwinds for equities.
My regular readers know that I have been bearish on the overall market for more than a year now. That did not change with the election in November. I would have been skittish around the markets if the outcome had been different, just for slightly different reasons, it should be noted. In my view, markets face two major challenges. One is longer term but more existential, this is around the federal debt.
Thanks to mismanagement by both sides of the aisle, the federal debt has more than quintupled so far in the 21st century. Trillions have been spent on largely avoidable wars. New taxpayer-funded government entitlements have been created, when existing programs were already on unsustainable paths. The Federal Reserve has made its share of monetary mistakes over the past 25 years as well. The Treasury Department’s decision to not refinanced a large chunk of federal debt during the pandemic and its immediate aftermath with 30-year treasuries, when it could have done so for under 2% would be comical if it wasn’t so tragic.
The government now finds itself in a situation where it is spending more to service the existing federal debt than on the defense budget. Spending on Medicaid has more than doubled over the past decade. Eventually this situation is going to have to be addressed, either by raising taxes and/or slashing spending significantly. While kicking the can down the road will probably be the modus operandi for the time being, my view is this will be an increasing obstacle to both the economy and markets in the years ahead.
More important in the short term is that valuations for the overall market are more than stretched using a variety of historical valuation metrics, even with the recent pullback in equities. This is especially true if the Atlanta Fed’s GDPNow is correct in now projecting that the economy will contract by more than 500 BPS from its performance in the last quarter of 2024 in the first quarter of 2025.
I expect volatility to remain elevated throughout March and that the recent downward trend with equities will continue. Fortunately, I have plenty of cash in my portfolio that I am incrementally putting to work now that the market finally seems to be breaking down a bit.
In Friday’s column, I will take a more optimistic tone and highlight several of these positions in stocks that are more than reasonably valued. These companies also are unlikely to be collateral damage in the escalating tariff war with the U.S. and its major trading partners.
At the time of publication, Jensen had no positions in any securities mentioned.
