Here are some things I think I am thinking about.
1) PAUSE. What. Is. Happening. With tariffs?
They say there are years where nothing happens and then weeks where years happen. Well, that’s what this last week feels like. My head is spinning. But I actually feel a strange clarity amid all the confusion. After all, I’ve been very vocally critical of the tariffs from the start and one of my main arguments was that if they go big on this then it could cause mass confusion, recession and panic. And we got hints of all that this week as they’ve ramped up the tariff rhetoric.
But then today we got a 90 day pause and now the stock market has roared back to where it was…last Thursday. What a rollercoaster ride. I think what the stock market is saying is that it likes that Trump appears willing to reverse course on this. But we’re still implementing gigantic tariffs. We’re just not implementing the insanely gigantic tariffs that were announced last week. Well, that’s generous. With China at 125% and all other countries at 10% the effective tariff rate is going to be 24%, down very marginally from the 27% rate from a few days ago. And bear in mind that the effective tariff rate was 2% on January 20th. So any way you cut it this amounts to a gigantic business tax increase, even after this update. Of course, the market is hoping that lots of deals will eliminate the 10% rates and that China will fold on its retaliatory position. I guess we’ll see.
Ignoring the market’s manic reactions the baseline economic impact here is still very damaging at worst and significant uncertainty for 90 days at best. So, we still have no idea what’s happening with tariffs, which is the worst part about all of this.
2) Bonds. What. Is. Happening. With bonds?
The 10 year interest rate ripped from 3.9% up to 4.5% in four trading sessions. As I write it’s now back to where it was 9 trading sessions ago at 4.3%. So, we whipped way lower and then went way higher. Again, it’s all uncertainty. No one knows where inflation and the economy is going. If inflation rips higher then bond yields will follow. If the economy rips lower then bond yields will follow. But we’re in totally uncharted territory because we’ve never had the entire global economy at the mercy of a single unpredictable person writing Tweets sporadically.
I talked to some of the largest bond traders in the world in recent days and they’re all so perplexed about it. They described it as “chaos”, “uncertainty”, “madness”. There are theories floating around about carry trade unwinds, funds imploding, China selling and just bidless markets. I suspect it’s a lot of all of these things. But the uncertainty of it all is the main issue. No one knows where any of this is headed and if you’re someone trying to lend money or set prices in the coming months then good luck guessing where you should be.
3) Staying the Course by Changing Course. What. Is. Happening. With our risk profiles?
What extreme uncertainty does in moments like this is expose your real risk profile. So, the stock market falls 20% and we’re all looking at this saying “well, this really is different this time”. And it’s true. We’ve never seen anything like this where the entire structure of global trade might get upended. So it all feels so rational for prices to be so volatile. And if you’ve been very aggressive riding all the certainty of the last 10+ years then this suddenly feels unnerving. And rightfully so.
But I always say that bear markets expose your fear because they expose your asset-liability mismatch. We don’t get scared because the stock market is risky. We get scared because the uncertainty across time becomes obvious. When we encounter an environment like this where it seems different this time it’s easy to look at the future and say “I don’t feel comfortable that the stock market will do what I expect it to do in the coming years”. And this raises the temptation to sell stocks and obtain cash because holding cash gives you 100% certainty of future principal. You’re not just scared. You’re scared across specific time horizons.
So what’s an investor to do with bonds and stocks both whipping around? The default answer is “stay the course”. But that’s also a bad answer because it doesn’t solve the inherent problem you might be feeling. It would be great if you could take about a 12-18 month nap, but that’s probably not a viable option either. So, if you really need some short term certainty the easy thing to do is to rip into whatever bonds you have and just get the certainty. Do not play the all in or all out game because then you risk missing out on days like today when the stock market rips 10% higher. But if you can strip out a piece of your bond allocation to get absolute certainty then you can tilt your allocation to help you navigate any potential uncertainty without necessarily reversing course in your plan. For example, if you have a 60/40 and that 40% piece is in an aggregate bond fund (it shouldn’t be, but that’s another story) then rip that thing down and disaggregate it. Sell 10% of the fund and buy T-Bills or hold it in a money market fund. And then stay the course. You have the same general allocation, but now you have increased certainty of time. This will give you absolute principal certainty to ride out any uncertainty, but it won’t result in the kind of “all in, all-out” style changes that leave you out of the market and later guessing about how to get back in.
Anyhow, that’s all I have for today. I suspect this is far from over so I’ll be back! Until then, stay invested, stay disciplined!