Enjoy the Tariff Respite While It Lasts
As of now, the temperature in the economic “room” seems to have lowered. The de-escalation of the tariff war with China suggests we should expect further recalibration of the next targets of tariffs, perhaps Europe. We should also expect, however, that the recent 90-day pause will not be the end of the story. This “cooling off” will get us through the holiday season, and there will be stocked shelves for Christmas. After that, who know
While we are welcoming the upswing in market optimism following the meeting with the Chinese in Geneva, we are also watching to see how this “de-escalation” will play out over the rest of year, and if it is, indeed, a viable framework for a new trade agreement with this very large competitor economy. What we know from experience is that volatility will remain elevated until a new trade agreement is set in place.
Until then we should expect market volatility to be more sensitive to another source as we move through the coming months.
The tax package which has been referred to as the “Big Beautiful Bill” could create unease in markets. If tariffs were going to pay for tax reductions promised in the campaign, and now tariffs are substantially lowered, where is the income to pay for the populist giveaways? No tax on tips and no tax on Social Security (this one estimated by the Center on Budget and Policy Priorities to cost another $1.2 Trillion to $1.5 Trillion over 10 years) extracts significant tax revenue from the equation.
This money would have to be borrowed, and we can’t believe this commitment to another $1.5 Trillion would not push the cost of that borrowing (think the rate on the 10 Year Treasury Bond) higher. That would mean higher borrowing costs for the government and mortgage seekers alike. We should expect the bond markets to be very sensitive to both the published discussions and the private leaks on this subject. Also, the Federal Reserve can’t help this situation by lowering the Fed Funds Rate – at best that might reduce the short-term rate on T-bills. We believe there is likely to be pushback in Congress from even the most stalwart of this administration’s supporters to reduce this ballooning cost. We should expect some attempted offsetting revenue raise to come from cutting to the “safety net” programs such as Medicaid.
All this is to say we expect markets, both bond and stock, to resume optimism with the backdown in tariff rhetoric. We also expect markets to veer up and down with wide swings with any change to that rhetoric as we move through the summer. We will enjoy the current calmer environment we seem to have this week, but as the saying goes – buckle up; it’s going to be a bumpy ride.
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The views stated in this letter are not necessarily the opinion of Cetera Advisor Networks LLC and should not be construed directly or indirectly as an offer to buy or sell any securities mentioned herein. Due to volatility within the markets mentioned, opinions are subject to change with or without notice. Information is based on sources believed to be reliable; however, their accuracy or completeness cannot be guaranteed. Past performance does not guarantee future results. Investors cannot invest directly in indexes. The performance of any index is not indicative of the performance of any investment and does not take into account the effects of inflation and the fees and expenses associated with investing. All investing involves risk, including the possible loss of principal. There is no assurance that any investment strategy will be successful.
