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.

Transforming a government-heavy economy into one where the private sector leads not only takes time but also requires a period of detoxification, according to U.S. Treasury Secretary Scott Bessent. The idea that pain may need to come before any gains has caught the nation and the stock market by surprise. 

 

Last week, I explained that "the administration's first objective, is to slow demand in the real economy. Keynesian demand-side economics says the best way to do that is to reduce spending. Doing so, they believe, will also slow inflation. How do they do that? By distributing less money to the greatest number of people possible. That means slowing wage growth and providing fewer social services to Americans in the median income level and below."

 

This "pain trade," also includes the president's tariff agenda. The result will be slower growth, less inflation, and fewer jobs. As the demand side of the equation craters the economy, President Trump's strategy will be to increase stimulus into the private sector to expand the industry.

 

The game plan, according to their script, is to maintain massive corporate tax cuts while reducing taxes even further by gutting the Internal Revenue Service and corporate financial oversight. Tariffs will play their part by forcing foreign companies to invest in new plant and equipment in the U.S. Part and parcel of this will be deregulation wherever possible to allow corporations to increase profitability. The president's "Drill, Baby Drill" is an offshoot of this idea.

 

If this sounds familiar, it should, because this is classic supply-side economics. This well-worn supply-side theory is supposed to increase the economy's productive capacity by reducing taxes and deregulation, which should boost investment, job creation, overall economic growth, and more tax revenues.

 

If successful, once again (if history is any guide), money will flow to the top 0.1 percent of top wage earners, who don't need it. They won't spend it either. Instead, they will save or invest it. In this case, this kind of stimulus is not inflationary. These are policies that have been used by both Republicans and Democrats for decades.

 

In this equation, however, the demand-side policies in the works will take effect much faster than the supply-side stimulus. That should cause a deflationary environment six months out. This is why Wall Street economists are predicting either stagflation or even recession. At that point, the Federal Reserve Bank will be called on to loosen monetary policy by cutting interest rates and switching from quantitative tightening to quantitative easing.

 

One might ask what happens if the Fed does not cooperate? We could easily see the economy tip over into recession. However, there is a long history of Fed bullying by presidents, when they wanted lower interest rates. I would expect that tradition would come into play quickly.

 

And what if the Fed plays along? Then the same dynamics would reward some borrowers. Once again, who benefits? Ask yourself who can borrow the most from banks when interest rates fall. Why the top one percent, as well as large corporations, that's who. And what have they done in the past with those borrowings — invested overseas?

 

If on the other hand, they are forced by some mechanism to invest here at home, the most lucrative areas with the best returns are labor-saving areas like artificial intelligence and robotics. If you believe for one moment that corporations will hire unskilled and under-educated workers, train, and pay them a meaningful salary, plus benefits, when a robot or software program could easily do the same job, I have a bridge to sell you.

 

Next week, I will outline the risks and rewards of this economic plan not only for the stock market, but for the well-being of those who are worried about their own economic future.

 

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.

For those of us in the business world, the myriad economic policy initiatives spewing from the White House are both confusing and at times difficult to understand. 

 

Certain policies seem to cancel each other out. Full employment while reducing immigration, drill-baby-drill to force oil prices lower while raising tariffs to increase prices? 

 

The point is that if even the professionals are having difficulty, how can those with little financial background hope to understand where the economy is going and why?

 

It appears, for example, that economic growth may be moderating as consumer spending weakens, while inflation remains stubborn. Some are calling for a recession. Others stagflation, while the president sees a golden age ahead of us.

 

After sorting through all the above and reading the statements of the president and his cabinet while ignoring the partisan rhetoric, some objectives of the Trump approach to economics have become clear to me.

 

Few would argue that over the last eight years, fiscal spending, deficit, inflation, and the size of government have exploded. As a result, the share of the economy represented by the government versus the private sector has grown lopsided. From an economic viewpoint, the present situation is unsustainable.

 

The Trump administration wants a larger private sector and a smaller share of the economy by the public sector. However, all that government spending did have some beneficial consequences. The growing gap in income and wealth between the haves and have-nots, which we call income inequality, slowed somewhat from historical levels. But it also increased inflation. Over those years, most consumers neither invested nor saved their government-fueled additional income. Instead, they spent their enlarged paychecks on another TV, a bigger car, a family excursion to Disney World, or a front-row seat to the latest rock concert.

 

Turning the direction of the world's largest economy, however, is no easy feat. It will take time and, according to the president and Scot Bessent, his Treasury secretary, will involve a period of pain and discomfort for most Americans.

 

Their first objective, in my opinion, is to slow demand in the real economy. Keynesian demand-side economics says the best way to do that is to reduce spending. Doing so, they believe, will also slow inflation. How do they do that? By distributing less money to the greatest number of people possible. That means slowing wage growth and providing fewer social services to Americans in the median income level and below.

 

Here is where Elon Musk and his DOGE efforts come in. His job, while ostensibly to reduce waste in the government, is also about cutting government employment. All department heads now have that as their No. 1 priority. That is how you generate real cost savings.

 

In addition, Congress has its marching orders. Given the ongoing budget discussions, it is certain that the Republican majorities in both houses intend to cut social services drastically. Medicaid, SNAP food assistance, school lunches, low-income housing assistance, and dozens of other programs are on the chopping block. Those cuts will impact those who are making $80,000 a year or less, which is roughly 81 percent of the population.

 

That will mean no more rock concerts, and in many cases no more jobs unless you want to replace immigrants picking tomatoes or peanuts. Once these bills are passed, it will likely take three to six months for all these spending cuts and lost jobs to work through the economy. 

 

Our income inequality problem will reverse. How will that impact a generation of populists counting on a better life in the months and years ahead? Next week, we will examine the next step in Trump's economic plan, which will center on his program to jump-start a faltering economy through a return to supply-side economics.

 

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.