The S&P 500 has now recouped all of the positive “Liberation Day” sell-off over the past few weeks, thanks mostly to the fact that the reality of the trade war won’t be as bad as feared back in early April. That continued this morning with the larger than expected U.S./China tariff reduction and last week with several pieces of positive trade news including 1) A U.S./U.K. trade deal that investors hope is a foreshadowing of more tariff reduction, 2) Lots of Trump “happy talk” on trade about more looming “deals” with South Korea, Japan, India and others. This news is obviously positive compared to a few weeks ago, but while I’m enjoying this morning’s rally I remain skeptical this news can push the S&P 500 sustainably towards (or above) 6,000. Instead, the main takeaway from the positive trade news of the past few weeks is that the Trump Put is now higher than it was in early April.
For a refresher, the “Trump Put” is an idea that if markets drop hard enough, Trump will pivot on tariffs and provide “happy talk,” and that’s exactly what happened in April. Markets freaked out in early April because, in part, investors feared the Trump Put wouldn’t occur until the S&P 500 was well in the 4,000s. But the past few weeks implied the Trump Put kicks in somewhere in the mid-to-low 5,000s for the S&P 500. That’s a good thing, as it limits potential market downside. However, because the news on the trade war is “not as bad as feared” and not actually “good,”I do not think it’s worth chasing stocks here.Put simply,tariffs are going to be much higher than they were in January (even if it’s just 10% globally, that’s still a lot).
Additionally, the policy volatility isn’t stopping (the tariff threat on movies and pharmaceuticals are evidence of that). Those two factors are powerful medium-term headwinds on stocks. Now, to be clear, I’m not outright bearish either. The economy probably can survive 10% global tariffs (or somewhere around there). And while 2025 earnings will be cut, the cuts don’t have to be drastic.
But the problem is with this bounce. The S&P 500 is trading well over 21X forward earnings. That’s not a “slowing growth” multiple or a “geopolitical uncertainty” multiple. Once again, we have no room for error. The bottom line is that the news wasn’t as bad as it seemed when the S&P 500 was at 4,850, and I don’t believe it’s quite as good as it seems at 5,800. It’s somewhere in the middle, which is why I’m sticking to my belief this market is still in a trading range, one that’s now a bit higher than before given the China tariff reduction (say 5,300-ish to 5,700- ish) and preference for defensive sectors such as short term Treasuries, quality factors such as the American Funds Income Fund, and minimum volatility until 1) Stocks are trading at more attractive valuations or 2) There’s more evidence of tariff reduction towards 10% global tariffs (or so) or other fiscal stimulus (tax cuts).
As a result, I am not trading out of my Fixed/Value positions yet. Yes, I am tempted to move back in, but I still believe lots more needs to happen to move this market beyond the current trading range. Understand that longer-term, I see huge growth in earnings and the economy, but for now, a prudent, more conservative approach is warranted.
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