As you are no doubt aware, stock markets jumped in historic fashion yesterday following a social media post by President Trump at 1:18pm:
The S&P 500 rose 9.52% on the day, it's third largest gain in history and largest since 2008. The technology-oriented NASDAQ index rose nearly 12%. Markets rallied on Trump's proclamation that he would be imposing a 90 day pause on most of his "reciprocal tariffs" that were originally announced on April 2nd. As a reminder, these reciprocal tariffs were additional levies on specific countries that were added to the President's initial blanket 10% tariff. These added measures took the US' effective import tax rate to 25%, exceeding expert's expectations and causing a global market rout over the past week.
Importantly, the President actually increased tariffs on China to 125%, which has retaliated to the administration's initial volley of tariffs. This seems relevant to mention since companies like Apple - who faces significant fundamental challenges given their manufacturing base in the country - rallied more than 15% in the wake of yesterday's news. The market responses of last Thursday, Friday, and yesterday suggest a lot of market action is occurring without much regard to actual fundamental consequences.
The whipsaw nature of yesterday's announcement was well illustrated by the below communications from Goldman Sach's economics desk. 21 minutes before the President's policy changing social media post, they declared the "White House was unlikely to quickly reverse most of the new tariffs," before updating their assessment a little more than an hour later.
For what it's worth, the research we have done validated Goldman's initial viewpoint. We know that the President deeply believes in tariffs and wants to correct what he and his advisor Howard Lutnick views as an unfair treatment of the US by the rest of the world. He also views tariffs as a key to raising revenue in an effort to reduce our historic fiscal deficit. His comments in recent weeks that he needed to take a "long-term view" and that the US economy may need to go through a period of "transition" as his policy was implemented seemed to underscore his commitment. Perhaps we should not be surprised, but the market's "tariff tantrum" clearly caused the President to abruptly change course.
It is fair to ask where we possibly go from here. Is this crisis over? Are markets and the economy going back to normal? Will the administration's policies now be implemented in a gradual fashion that the economy and businesses can slowly digest?
We want to be optimistic, but it is hard to believe that it is simply smooth sailing from here. Economically speaking, it is likely that a significant amount of damage has already been caused by the policy uncertainty of the past few months/weeks. There is nothing that kills economic expansion like uncertainty; business owners have almost assuredly pulled back on hiring and capital investment in recent months. There are some who believe we have already entered a recession and that the lagged nature of economic data has not yet caught up to reality.
As we noted above, tariffs are also still in place at a 10%+ level (plus China's 125%). This would still prove to be the highest level of US tariffs since World War II (and it's not even close). Yesterday's announcement removes, temporarily, the excessive level of reciprocal tariffs announced last week. But as Goldman Sach's note indicates above: country-specific deals will be negotiated that take these tariffs to some higher level. Is this really so different that the stock market should fully recover its highs?
Valuations also remain at very elevated levels. Things were just beginning to look interesting, but they certainly weren't cheap. Entering yesterday morning, the S&P 500 forward PE multiple stood at 17.9x. Yesterday's performance puts us back at 19.6x - historically expensive, and potentially with earnings degradation on the way.
Finally, and very importantly - yesterday also proves that what we believe policy is today may very well not be policy tomorrow. It is very hard to take a definitive investment stance when enormously impactful economic policy can be changed with a few taps on a smart phone. The President's social media post yesterday erroneously stated that only China had retaliated against the US' reciprocal tariffs. Will the European Union's announcement yesterday morning be followed by a new wave or tariffs tomorrow? [Editor's note: the EU has now pulled back on it's retaliatory tariffs, underscoring how fluid the situation remains].
We noted in a recent missive that President Trump's policies and approach may very well prove effective over time, but that the potential range of outcomes - both positively and negatively - are extremely high. We feel that assertion is doubly true after yesterday. We will be inclined to fade any rally from here and look for opportunities to further build positions of liquidity. While we can't handicap what the current administration will do from here, we know that market valuations do not justify blindly jumping back into this market amid a highly uncertain backdrop.
Sincerely,
Andrew Hart Ryan Davis, CFA, CAIA
Chief Executive Officer Chief Investment Officer
ahart@nextcapitalmgmt.com rdavis@nextcapitalmgmt.com
Important Disclosure Information
Please remember that past performance is no guarantee of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by Next Capital Management, LLC [“NEXT]), or any non-investment related content, made reference to directly or indirectly in this commentary will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, no portion of this discussion or information serves as the receipt of, or a substitute for, personalized investment advice from NEXT. Neither NEXT’s investment adviser registration status, nor any amount of prior experience or success, should be construed that a certain level of results or satisfaction will be achieved if NEXT is engaged, or continues to be engaged, to provide investment advisory services. NEXT is neither a law firm, nor a certified public accounting firm, and no portion of the commentary content should be construed as legal or accounting advice. A copy of the NEXT’s current written disclosure Brochure discussing our advisory services and fees continues to remain available upon request or at www.nextcapitalmgmt.com. Please Remember: If you are a NEXT client, please contact NEXT, in writing, if there are any changes in your personal/financial situation or investment objectives for the purpose of reviewing/evaluating/revising our previous recommendations and/or services, or if you would like to impose, add, or to modify any reasonable restrictions to our investment advisory services. Unless, and until, you notify us, in writing, to the contrary, we shall continue to provide services as we do currently. Please Also Remember to advise us if you have not been receiving account statements (at least quarterly) from the account custodian.
Historical performance results for investment indices, benchmarks, and/or categories have been provided for general informational/comparison purposes only, and generally do not reflect the deduction of transaction and/or custodial charges, the deduction of an investment management fee, nor the impact of taxes, the incurrence of which would have the effect of decreasing historical performance results. It should not be assumed that your NEXT account holdings correspond directly to any comparative indices or categories. Please Also Note: (1) comparative benchmarks/indices may be more or less volatile than your NEXT accounts; and, (2) a description of each comparative benchmark/index is available upon request.