Dear Reader,
Good morning! Happy Friday.
Today is bring your child to work day, so I have my son Teddy here with me.
Today I want to talk about market volatility.
I was talking to a friend last night who was like, “I look at my 401k and it’s giving me panic attacks.
“It’s up, it’s down. What do you make of all this volatility?”
April’s intraday volatility is on pace to be the highest since Covid.
It’s the fourth highest since 1979.
It’s only beaten by The Great Recession and October 1987.
History tells us volatility is pretty much a bad thing.
There’s an old expression on Wall Street: “markets take the stairs up and the elevator down.”
Volatility usually comes with a lot of uncertainty.
We have this split-screen scenario.
Before we started this period, we all knew the market was high.
It was trading at historically high P/E rates, but the underlying economy was doing fine (of course, driven by fiscal spending).
But now we have a situation where companies are reporting their quarterly earnings and a lot of them are good.
Remember, this tariff policy started after Q1, so it won’t be reflected in earnings until next quarter.
So a lot of the earnings for Q1 look good.
But when you listen to these conference calls, CEOs are saying look, our input costs are going up, there’s tariff uncertainty.
And companies have one of two ways to play that.
When you’re forced to pay a tariff this big you can pass that cost directly to consumers, or you can absorb the cost and try to take market share from your competitors who can’t afford to do that.
Walmart is going to try option two.
But either way you go, profits go down. If you pass tariffs to your customers people buy less.
If you take the predatory route, which is very smart, and absorb as much of those tariff costs as you can, profits will go down.
In the long-term you’ll take market share. Walmart has the balance sheet to do that.
But we see a lot of early recession indicators showing up.
Airline and travel bookings are dropping. Always an early sign of a recession – that people have less discretionary income.
Airlines right now are reporting very weak travel demand.
Credit card companies are starting to sock away reserves.
We have a Wall Street at war with itself.
Is it a bull?
Sure, for a couple of hours.
Then it’s a bear.
Bull, bear, bull, bear.
There’s a big argument between bulls and bears on Wall Street right now.
And I’ve always found it interesting how that fight is expressed in the stock market.
I also wanted to touch on China tariffs.
The Trump administration this week seems to be walking back their desire for tariffs, so we’ll see what happens.
Interestingly, Scott Bessent, our treasury secretary said at a private JPMorgan conference, that what we’ve done to China is a “trade embargo.”
Very telling he used the word, “embargo.”
Embargoes are a very serious thing.
They are acts of war. Make no mistake about it.
You think of Britain embargoing Germany in World War I, and in World War II, you think of the United States – people think Pearl Harbor just happened out of the blue…
The evil Japanese empire decided to attack us on Pearl Harbor, December 7th, 1941.
That’s not what happened.
128 days before Japan attacked us at Pearl Harbor we put an embargo on their oil and froze their assets.
Pearl Harbor was Japan’s reaction to that.
When we look at this trade war with China, this “embargo”…
If you’re in China’s shoes, you think to yourself, perhaps this is an act of war.
Certainly financial war – no doubt about it. Especially when we see our own side use the word embargo.
Of course, President Trump downplayed and started to walk back, saying, “I’m going to be very nice to China.”
So it seems this week they’re really trying to extend an olive branch.
But China is sitting there saying, look – whoa – we’re going to do what we think is in our best interest.
Which is a vague and interesting comment.
So anybody who tells you they know where the market is going is full of it.
Nobody knows where the market’s going. It’s being driven by external events, politics, the possibility of conflict with China.
That’s what I have for today.
See you Monday.
“The Buck Stops Here,”
