Bold Predictions on Where Stocks Will Bottom

A whirlwind week

Let's recap: Last week Trump announced higher global tariffs than anyone could have possibly expected. Markets instantly jumped to the conclusion that trade ties would be cut, leading to job losses and halting economic growth. This sparked a rapid selloff in the stock market as investors priced in 62% odds of a recession — up from 20% at the start of the year:

Note that this was all happening as economic data was still positive, as we wrote last week. It's the anticipation of recession that the market is worried about. Hence why jobs are still growing (with a blowout non-farm payrolls figure last Fri) that was almost completely ignored. Powell, too, sounded hawkish but he is basing his views on lagging economic and inflation data.

Recession forecasts can sometimes be self-fulfilling. For example if credit spreads (which affect corporate borrowing rates) widen like they have over the past week, corporates struggle to refinance loans or source new financing. This leads to lower investment and job cuts, ironically initiating the downward cycle in the economy. We may already be in a recession but the data won’t show it until a few months from now.

Trade tensions heightened through the week but we got some reprieve on Weds. Trump “blinked” ostensibly because 70+ countries came to the negotiating table, but also because it was causing stress in the bond markets. Therefore, Trump announced a 90-day delay in reciprocal tariffs, leaving only the baseline 10% tariff in place. This is in line with our thinking that tariffs were not meant to be permanent. SPX rallied over 10% on this news, the largest short squeeze in history, with over 95% of all issues on the NYSE positive (a massive breadth thrust).

The EU has said they are ready for negotiations, which is a big deal since they were expected to retaliate and play hardball. However, not all tariffs were removed, notably those placed on China (which are now at 145%). So we still have the issue of ongoing policy uncertainty…

What’s the next phase?

After witnessing the events unfold over the past few weeks, our thinking on tariffs has evolved. We now think the baseline 10% tariff is likely here to stay, regardless of trade deals that may or may not be struck over the coming 90 days. We think Trump is acting deliberately, and will not stop short of reducing the US’ trade deficit with the rest of the world. He views this as the only way to reverse decades of socioeconomic imbalances and wealth inequality.

There won’t be a fast resolution as Wall Street was mistakenly assuming. That’s because rebuilding domestic capacity, rejigging global supply chains, and hiring local workers take time. USMCA took a year to negotiate; NAFTA took 3 years; and the Trans-Pacific Partnership took 8 years. We also haven’t seen all of the lasting impacts of this trade war, including supply chain chaos, price spikes, hiring freezes, bankruptcies, capital controls, taxes on foreign entities, etc.

US consumers will be hit by higher prices, but foreign countries will be hit harder (due to how trade values work; the surplus country is almost always affected the most). This global deflationary impulse could weigh on all non-US countries, which means a global slowdown where the US outperforms in relative terms.

While we expect economic activity to slow down to some extent, we don’t think this will lead to a 2008-style credit crunch. There simply is no overleveraging or bad loans that can snowball. Debt levels in the private sector are quite low at the moment, as shown below:

We remain optimistic

Because this has been a man-made crash, meaning a deliberate government intervention rather than natural market forces (similar to Covid shutdowns), it can reverse just as quickly as it started. As Weds showed, all it takes is a tweet for all this to go away. Thus, we hold out hope that we may be closer to a bottom than anyone can reasonably predict.

For instance, a series of negotiations can lead to lower trade barriers and/or further delays in tariff implementation, including a reduction of the baseline 10%. We may be getting close to a deal with China, or at least the workings of one. We know Trump has already blinked once, which shows he can still be pragmatic and respond to market pressures.

There's also the distinct possibility of a Fed put. Thursday and Friday’s inflation data was negative, which gives the Fed cover to cut interest rates more aggressively. Prior to Thurs, Powell was hamstrung from reacting to the DOGE and tariff impacts because of inflationary risk. We have long argued that inflation is not a concern which means the Fed should feel more free to react.

Any of these events could trigger a >5% rebound in markets, like we saw on Weds. For this reason, we don’t think it is prudent to be sitting on too much cash. The best days of the stock market often appear at bear market bottoms, which we don’t want to miss out on.