This week, the stock markets had one of their largest single-day rallies since 2012, after President Trump suddenly put some of his tariffs on hold for 90 days. He then gave back half of it the following day. Investors wonder if this was a bear market bounce or if it could mean something more.

 

Media sources are crediting the market melt-up to various factors. Some believe Trump decided to soften his stance on tariffs after spending the weekend huddled with his U.S. Treasury Secretary Scott Bessent. Bessent, who the business community believes is a voice of reason in a room full of tariff advocates, had urged the president to pause his reciprocal tariff deadline. He believes foreign nations, given more time, could come to the negotiating table with even better deals benefiting the U.S.

 

He may have a point since few of our trading partners understand the math behind these reciprocal tariffs. Are they about fentanyl, existing tariffs, hidden taxes and other barriers to American imports, their specific trade deficit with the U.S., or all the above? If it is only about reciprocal tariffs, then reducing one's tariff (as Vietnam already offered to do) is simple.

 

It is a different kettle of fish if, instead, Trump is demanding a total reduction of each country's trade deficit with America. That could involve passing legislation to reduce value-added taxes in some cases. In others, it might require far-reaching legislation to undo protectionist measures defending domestic industries for many countries. That would involve developing a consensus among several political parties that share power in governments. It may even require, in some instances, a referendum requiring a popular vote.

 

In any case, before this pause, a growing number of Wall Street research houses were not only ratcheting down their targets for the S&P 500 Index but also raising the probability that Trump's tariff policies could cause a recession this year.

 

Some believe the president was forced to announce a pause in the tariff schedule. Bond traders believed the fixed-income market in the middle of the week was coming unglued. On Wednesday night, the prices of U.S. Treasury bonds plummeted as foreign investors, especially in Japan, were dumping their holdings while the U.S. dollar plummeted.

 

Determining why treasury bonds, a haven in times of distress, experienced such sharp price declines is difficult at best. Who were the sellers? We know China is the second-largest holder of U.S. Treasury bonds after Japan. We also know that the only exception to Trump's reciprocal tariff pause was China. At this point our tariffs on China total 145 percent. China, on the other hand, has moved its U.S. tariff rate to 125 percent.

 

It could be that China is now reducing its holdings of our sovereign debt in response to the U.S. tariff threat. And this China/U.S. tariff war may continue. Charles Gasparino of Fox Business posted on X that the Trump administration is moving toward a possible delisting of Chinese public company shares on U.S. exchanges. If so, Chinese stocks listed here, are ignoring that possibility.

 

A better bet could be that the so-called "yen carry trade" may be unraveling. For decades, traders would borrow yen, exchange yen for dollars, and then invest those dollars into assets that could give them a better return (like U.S. stocks). However, the Japanese stock market has declined along with U.S. markets, while the yen has strengthened considerably against the dollar over the last few weeks. Some clients of large global financial institutions trying to unwind their yen carry trade could be in trouble.

 

How all these variables play out in the stock market is like putting together a jigsaw puzzle with missing pieces. Investors are so focused on this tariff issue that good news, like the cooler-than-expected data from both the Consumer Price Index and Producer Price Index, were largely ignored. So too was the approval of a budget plan in the House that reflects the president's agenda.

 

After this week's monumental bounce, some hopeful bulls believe the bottom is in. Others say that the extraordinary bounce in the averages is a classic sign of a bear market. They point out that if history is any guide, some of the biggest upswings in stocks occur in bear markets. If so, a 10-15 percent spike in the averages could happen at any moment depending on the president's next tweet on Truth Social. To me, until we see a successful conclusion to the tariff issue, which could take several months, I believe any rally would be an ideal time to trim portfolios and get more defensive.  

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

Stocks fell to kick off the second quarter following the worst quarterly performance for equities in the past three years. The culprit was Wednesday evening's "Liberation Day" announcement of tariffs far worse than the markets expected.

 

By now, most readers know that the president not only levied a 10 percent tariff on all nations across the board, but he also added reciprocal tariffs to that total on individual nations. China was signaled out for the harshest treatment with a combined 54 percent total round of tariffs. In response, China announced 34 percent tariffs on U.S. goods.

 

As I warned readers last week, these tariffs would be "extensive, explicit and enforced."

 

The announcements have triggered a two-day sell-off in equities around the world, but it is the U.S. stock markets that are bearing the brunt of the losses. Over $3 trillion was wiped off the value of the S&P 500 Index thus far. Some investors found that confusing since the assumption was that these tariffs would hurt foreign markets far more than our own and were nothing more than a bargaining chip.

 

Neither assumption is true. This year's market decline should not be dismissed as a mere blip in a bull market. To be clear, this is not just a correction, it is a confirmation and a direct result of a significant regime change. It is a shift in our political and economic system which I have been writing about for years.

 

The present tariff actions are the latest manifestation of this shift. We the people will be the victim of this tariff war at least in the short to mid-term. The architects of this event, starting at the top, have repeatedly warned us that not only has the game changed but a period of discomfort, pain, detox, or whatever you want to call it is to be expected. It is a case of short-term pain for long-term gain.

 

One only needs to do the numbers to realize it is the American consumer and corporations who will bear the brunt of these tariffs. Some consumers are already stocking up on household items in preparation for shortages and price hikes. Tariffs, despite the president's denial, are a tax on those who purchase imported goods. Trump's chief trade adviser, Peter Navarro, said this week, "tariffs are going to raise $600 billion a year, about $6 trillion over a 10-year period."

 

That money is coming straight out of corporate profits. If instead, companies pass on those added tariff costs to you, the consumer, you are on the hook for this new tax. It will cost the average American family between $3,800 and $4,600 annually. Whether you call it a tariff, or a tax is all the same to me.

 

That money will go directly into the government's coffers. It will hit the working class the hardest — dropping disposable income by 2.3 percent. This will be the steepest tax increase since 1951. This kind of sudden shock to the system will have an immediate impact on all the metrics that comprise the state of the economy. Inflation will rise. Economic growth will slow. Unemployment will increase. The dollar and interest rates will fall. And financial markets, in turn, will reflect that by declining as well.

 

And this is not the only shock the U.S. may endure. We have yet to hear from three of our largest trading partners, Europe, Japan, and Korea. Will they follow China and retaliate, do nothing, or negotiate? Depending on their response, will President Trump escalate the tariff war or reduce tensions?

 

Could Trump's tariffs cause a recession? That depends on what is negotiated by whom and for how long. It seems clear that whatever happens, this trade crisis will be with us for some time. The clock will be ticking while we wait. The longer it lasts, the higher the probability of recession.

 

In the meantime, congratulations to the Trump team for accomplishing some of their objectives in record time. Treasury Secretary Scott Bessent had made it clear a month ago that Trump wanted the ten-year U.S. Treasury bond yield lower and oil prices down. Given the 16 percent decline in oil prices over the last two days and a bond yield of under 4 percent, I would say mission accomplished. Of course, equity markets had to go into free fall to accomplish that, but neither Trump nor Bessent seem concerned about what happens to the stock market in the short term.

 

How will stock markets handle this? Look at this week's market action for a clue. The volatility has been through the roof. The S&P 500 Index is now down 16 percent from the highs. I had cautioned that we could see a drop of between 10-13 percent in the S&P 500 Index and maybe even as low as 20 percent. Now what?

 

Could we see further downside, yes, we could,yes but could we also see instead a 10 percent spike higher in the averages in a day or two? Either is possible because the fortunes of the market and the economy are and will continue to be Trump-dependent.

 

Given that the president strives to always be at the center of attention, this situation suits his personality perfectly. Many on Wall Street believe Trump's plan is to force the economy lower for the next nine months while blaming the Biden administration for the decline. At that point, his supply-side efforts such as maintaining the 2018 tax cuts, deregulation, etc., will kick in. That should boost the economy just in time for the mid-term elections — if all goes as planned. If it doesn't, the risk would be a recession.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

On April 2, Donald Trump has threatened to levy tariffs on several nations. This is in addition to the tariffs he has already imposed on China, Mexico, Canada, and now global auto producers. The question is whether the "if" in tariffs is still possible.

 

No, it isn't. The president is making good on his campaign promises to create an even playing field between the U.S. and our trading partners. Steel, aluminum, and the global auto tariffs he announced Wednesday evening are only the beginning.

 

Unlike his first term, this time around his tariff initiatives will be "extensive, explicit and enforced," as one hedge fund manager told me. That will be bad news for the financial markets but there may be a silver lining.

 

I have often said that markets can absorb and adjust to both good news and bad. If the trends are negative, investors and traders can hedge their portfolios, or move to the sidelines. Good news, as we all know, is much easier. Buy what you can and as much as you can. What the markets cannot deal with is uncertainty.

 

My readers are old enough to remember the presidential elections. The narrative among financial markets was that the country under Trump's presidency would mean four years of higher corporate profits, rising stock markets, the end of our debt crisis, and the Ukraine conflict.

 

Sadly, many investors, traders, and company managers focused on the positives but ignored the negatives. The financial markets and many voters bought into the campaign promises of the winning candidate lock, stock, and barrel. It is understandable. In populist times like this, hope springs eternal once every four years during presidential elections.

 

However, since the inauguration, investors as well as corporations and small businesses have been dealing with a mountain of uncertainty. Radical and sudden change will do that to you. Few had done the math on what tariffs or downsizing the government would do to the economy and inflation. How exactly would the president reduce the nation's debt or end the Ukraine/Russian war, and what would the downside be?

 

Those issues were dismissed as negotiating tactics or, as part of America's long tradition of campaign promises, were never meant to be kept. Instead, we discovered that Donald Trump was deadly serious in his intentions to radically transform the nation and its political and economic system quickly. "Burn it all down," was not just a stump speech.

 

The changes taking place in downsizing government and reducing the workforce are ongoing. No one, not even the Fed, knows how this will turn out. Uncertainty has become a popular word. Fed Chair Jerome Powell used the word "uncertain" 22 times during his March 19 FOMC meeting remarks.

 

If you throw in the daily threat of tariffs, you have a perfect storm of uncertainty. Donald Trump's on-again, off-again, tariffs have left investors uncertain and stressed out with their finger on the buy or sell trigger hourly. That is why the S&P 500 Index is off by more than 10 percent while markets overall are experiencing 1-2 percent swings in the averages almost every day.

 

The announcement of tariffs will remove at least one level of uncertainty from the markets. Of course, that won't resolve the issue in its entirety, but it might help to calm the markets for a little while — until the next shoe falls.

 

We do not know what our trading partners will do, or what the U.S. response will be to their reactions. They may retaliate or they may negotiate. In addition, we still need to grapple with the rest of Trump's initiatives and their impact on the economy, inflation, and employment. That can take another 3-6 months. You can read my thoughts on the subject in this week's column, "The Trump Economy 101."

 

Unfortunately, after two-plus years of great returns, investors are paying for those gains this year. On June 27, 2024, in my column,  "What can investors expect from the coming era of populism" I warned readers that in the last populist era between 1964 and 1982, stocks went nowhere — except in election years.

 

As for the short-term, I expect more of the same in markets. I predicted a dead cat bounce last week and we got that for two days. However, the auto tariff announcement ended those gains. We could see the market test the March lows before another move-up sometime in April, although once again it would be temporary. Alas, we are Trump-dependent, and he is no friend of the stock market nor are many of his voters. Why would that be the case?

 

Many of his following have little if any savings and none in the stock market. In the last election, Trump captured the vote of lower-income household voters who earned $50,000 or less, while those making $100,000 or more voted for Harris. It seems a safe bet that the stock market is meaningless to many of his supporters, although not all. I would hazard a guess that the stock market rout to them is simply another example of how the deep state works to undermine the president's initiatives, at least according to the comments I have read from far-right media figures.

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.

This week, the Federal Reserve Bank hiked its inflation forecast and reduced the growth target for the economy this year. Despite this news, traders termed the March FOMC meeting a "dovish pause," although it did not help the stock market.

 

The upshot of Chairman Jerome Powell's Q&A session on Wednesday afternoon after the FOMC meeting was that as far as the future is concerned, the Fed would need to wait and see just like the rest of us. In the meantime, the bank decided to slow its quantitative tightening program. That was interpreted as dovish by most Fed watchers since it does add liquidity to the credit markets.

 

Powell did say tariffs would probably add to the inflation rate (from 2.5 percent now to 2.8 percent). Although for the most part, he believed these measures would be "transitory." The rate of economic growth would also fall from 2.8 percent in 2024 to 1.7 percent this year.

 

Those forecasts, while not what I would call a full-fledged period of stagflation like we experienced in the 1970s, are akin to my own expectations. I would call it a brief bout of stagflation but with a small "s." I see a quarter or two of slower growth and a smidge higher inflation rate, but I do not see these trends remaining in place for the full year.

 

"I don't know anyone who has a lot of confidence in their forecast," admitted Powell, but the median of Fed officials still expect two rate cuts this year. However, their conviction on where things are heading is weak, and understandably so. After many years in the driver's seat, the Fed is now in the back seat as far as the economy is concerned.

 

Fiscal policy as interpreted by Donald Trump is now calling the shots. Depending on how badly the coming tariff war develops, the administration's overall trade policy, spending cutbacks, immigration restrictions, and deregulation, we could see a recession.

 

However, if tariffs turn out to be simply a negotiating tactic, as many expect, tax cuts do get passed, and somehow the deficit falls then growth could resume, inflation remains in check, and the markets could live happily ever after. I give 50/50 odds on these economic outcomes.

 

I hate "on the other hand" statements, but sometimes, they are what they are. Whether your cup is half full or half empty, I suspect, depends on your political persuasion. As Powell said, "I mean, it's really hard to know how this is going to work out." My sentiments exactly.

 

Unfortunately, the financial markets do not do well when faced with the unknown. As such, the present turmoil in the markets should continue. About the best I can say is that we should expect the daily 1-2 percent swings in the equity market to slow down a bit after this week after Friday's multitrillion-dollar options expirations. That does not mean the downside is over. The fate of the markets remains dependent on the news coming out of the White House.

 

Behind the scenes, the top men at Treasury and  Commerce and Trump's economic adviser, Kevin Hassett, are working hard to reduce the impact of the coming tariffs before the deadline. Scott Bessent, the U.S. Treasury secretary, appears optimistic they can work a deal between the U.S. and our largest trading partners to roll back tariffs before the April 2 deadline. If so, that would go a long way to alleviate the downside pressure on the markets.

 

At its low, the S&P 500 Index has been off by a little more than 10 percent. Since then, we have bounced, as I expected, but we could still retest those lows or even break them. Sentiment among market participants couldn't be worse. That makes me suspect there might be some light at the end of the tunnel. Of course, I could be wrong and that light at the end of the tunnel could be a freight train. Let's see what happens.

 

The market's decline has been one of the fastest in history. The fall has been fueled by the Trump administration's economic policies. The question most investors are wrestling with is what to do about it.

 

Looking back on this period in a year or two, I guarantee that most investors will have trouble remembering exactly what happened. There is nothing abnormal in this decline thus far except its speed. It is a simple garden variety pullback, which occurs at least once a year if not more. It is the price of doing business for equity investors and savers with tax-deferred retirement accounts.

 

Given that, the decline is probably a good thing for an over-extended market on the upside. Stocks normally take the escalator up and the elevator down. In the pain game, I believe fast is better than slow when dealing with the emotional side of investing. Hopefully, the markets will bounce before too many more negative emotions surface.

 

I say that because emotions are your greatest enemy when investing. It would be a rare reader indeed who isn't feeling worried and stressed right now when dealing with the market. The S&P 500 Index is down more than 10 percent, NASDAQ minus-17 percent and the Russell 2000 minus-18 percent.  Is it time to bail?

 

No. The time for that decision is past. A month ago, taking some off the table may have made sense. Today it doesn't.  "But what if it goes down even more?" Let it, at worst you are halfway through a 20 percent correction but more likely on the eve of a turnaround.

 

Tom Lee, the founder of FSInsight, and a frequent guest on CNBC, reminds us that since 1928 going to cash and missing the 10 best days in a year reduces returns from 8 percent annually to minus-13 percent.

 

September 2022 was the last time investors were this pessimistic, according to the American Association of Individual Investors (AAII).

 

At the end of February, the proportion of investors identifying as bearish reached 60.6 percent.  Historically, when this has occurred, the average subsequent 12-month return has been 24 percent.

 

How can you resist that desire to sell? Stop looking at your accounts. Watching your portfolio daily in a down market is behavioral suicide. Don't do that.

 

So enough with the pep talk. Instead, the market had some good news this week for a change. The Consumer Price Index (CPI)  and the Producer Price Index (PPI) came in cooler than most expected. I say "most" because my forecast of weaker inflation numbers proved accurate. Next month's data will show a 2.4 percent CPI, which will be weaker again. The following month should show a decrease as well. However, given the markets' focus on tariffs and Trump's economic policies, the inflation news did not matter to investors.

 

I expect the unemployment rate will rise as the administration reduces the number of the 3 million federal government workers. If you combine that trend with a slowing economy that is also being engineered by President Trump and his motley crew, we will have developed a perfect storm. That will provide a gateway for the Federal Reserve Bank to begin cutting interest rates once again.

 

Remember the Fed has two areas of responsibility: fighting inflation and maintaining employment. Chair Jerome Powell has already stated several times that the Fed now considers employment the focus of monetary policies. The bond market is already betting on a rate cut as early as May or June, with more to follow. That should be good for the stock market, which usually begins to discount events six months out.

 

Over the last few weeks, I have warned investors to expect as much as a 10-12 percent decline in the S&P 500 depending on the president's actions. He has delivered on that assessment and thus the markets decline. He continues to rile markets and therefore the potential for additional downside remains.

 

The latest University of Michigan consumer sentiment numbers dropped another 10 percent in March. Trump has now admitted his policies will cause at least a slowdown in the economy, higher unemployment, and as for inflation, who knows?

 

The president promises this will all be worth it for those who have faith. Depending on your political bent, you either believe him or not. The stock markets, however, do not deal in faith. The data says stagflation, which has been my prediction for several months. What does well in that environment is foreign markets that do not suffer from the same malady, bonds, and precious metals. This week, gold hit record highs, China and Europe climbed higher, and bonds did much better than stocks. 

 

As for the overall market, it is Trump-dependent, and the president has shown that he is no friend of the stock markets. Wall Street strategists and technicians are looking for at least a dead cat bounce. That is certainly possible given that we still have three weeks until the April 2 reciprocal tariffs are implemented. Who knows, the president might lose his voice in the meantime, change his mind on the tariffs or something may occur out of left field that we aren't expecting.  

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.