Trade Had Its Problems, Now It's a Mess
Reform was needed on tariffs but this nonsense might have spurred an all out trade war.
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After rising slightly during trading on Wednesday, equities hit hard on Thursday: The Dow fell nearly 1,700 points on the day, the S&P 500 dropped nearly 5% and the Nasdaq was off 6% on Thursday. The small cap Russell 2000 had a sharp decline of 6.5% and is now in official bear market territory after the market had its worst daily performance since 2020. Elsewhere, oil fell 7% on the day as worries about global economic growth mounted. The dollar also sold off hard, having its worst day against the Euro in a decade. The Magnificent 7 bled out over $1 trillion in market value in trading yesterday.
The trigger for the decline was provided by the rollout of new tariff policies by the administration after the bell on Wednesday. To put it mildly, the tariffs proposed exceeded the worst-case scenario analysts and economic pundits had penciled in, and significantly so. I will be the first to state the U.S. has had the short end of the stick in regard to trade policies on many fronts for a generation or two now.
China had plundered western intellectual property for quarter of a century with little to no real consequences. It is also unconscionable to me that 35 years after the Berlin Wall fell that U.S. autos and auto parts are subject to four times the tariffs in Europe as their counterparts received in the U.S. That said, new tariff policies should have been much more targeted and initially focused on the nation’s most abusive trade partnerships. The way the administration chose to come up with individual reciprocal tariff percentages against individual countries using trade imbalances was non-nonsensical, beyond excessive, ham-handed and frankly, economically asinine.
To slap 46% tariffs on Vietnam, a county that policy makers from both parties have encouraged American multi-nationals to move production from China to for over a decade now, was a complete policy reversal and backfire. Huge new tariffs on its Asian manufacturing sources, a quarterly miss and tepid guidance for fiscal 2025 triggered a 40% decline Thursday in the stock of RH RH. Other major American multi-nationals that heavily rely on goods from Asia like Nike NKE were also pummeled.
After yesterday, there is some real blood in the water as the Volatility Index soared to end the day at the 30 level. I expect this heightened volatility in the markets to be with us in the weeks ahead as trade tensions fluctuate greatly. Some countries will choose to immediately retaliate with large tariff hikes of their own, as China just announced. Others will take a wait and see approach. Some will agree to trade concessions to lower tariffs. Each new turn on this front is likely to drive equities and other markets in the trading sessions ahead.
Fortunately, I had built a large allocation in short-term treasuries over the prior quarters as the markets were clearly overbought. At one point the S&P 500 was trading north of three times revenues. In comparison, the Index got just above two times revenue at the tail end of the Internet Boom before the markets came tumbling down.
A lot of that short term treasury hoard is due to redeem throughout April. Now that there are finally substantially lower entry points in equities and a real whiff of panic in the market, I will be deploying a lot of that dry powder back into stocks incrementally. What I am buying will make up the majority of my columns this month as the days and weeks are likely to be fraught with plenty of danger for investors as well as significant opportunities.
At the time of publication, Jensen had no position in any security mentioned.
