Tariff Question Leaves Investors Confused and Uncertain
Four key issues confront the market as earnings season winds down and new trade rules are imposed.
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Many investors were prepared for a market correction to begin last Friday on the surprisingly large downward revision of employment data. The narrative was that the weakness in the Trump economic agenda was finally starting to hit, and with the indexes extended and many stocks at aggressive valuations, conditions were ripe for a correction.
That bearish belief was quickly called into question Monday when stocks rebounded sharply, primarily due to the increased likelihood that the Fed will cut interest rates at its next meeting in September and maybe twice more before the end of the year.
The bounce stalled out a bit on Tuesday, and action is mixed on Wednesday morning as investors digest some negative reaction to earnings and contemplate more trade and tariff moves by President Trump as his latest deadline looms.
The market is at a critical juncture as investors watch to see if the Monday bounce can continue and gain some traction, and whether the support at Friday’s low will hold.
There are several key issues to contemplate. The first is the economic impact of Trump’s tariff and trade program. The Wall Street Journal reports that six months into the new tariff regime, there has been surprisingly little impact on the economy. The tariffs have brought in billions in extra revenue, and so far, there has been only a slight uptick in inflation. There has not been a rush to build new factories in the U.S., and there has been little impact on economic growth so far.
While the impact of tariffs has been relatively small, they have had a tremendous impact on strategists, pundits, and even the Fed. They are all trying to forecast the impact, and so far, no one has done a very good job of it. There will be more economic data in the months ahead that will provide a clearer picture of tariffs, but at this point, they are neither the boom nor the disaster that many have predicted.
Another key issue is that AI is carrying this market and is largely sheltered from the tariff issue. There is no slowdown in AI, and investors are still extremely anxious to build exposure on pullbacks and dips.
There are also some signs of rotational action into smaller stocks and areas of the market that have lagged. Valuations are not that extreme outside big-cap technology.
On the negative side of the ledger, earnings season is winding down, and we are moving into the toughest time of the year seasonally. Technically, the market needs a rest, and that may be self-fulfilling to some extent.
It is very likely that the bears that are looking for a collapse will be disappointed because there is very likely to be strong underlying support. The most likely scenario is very choppy action with rotational action that serves to correct various pockets of excess.
We have a flat open setting up on Wednesday morning with some earnings and trade news likely to cause movement.
At the time of publication, Rev Shark had no positions in any securities mentioned.
