By Peter Tchir of Academy Securities
The President undid a few things yesterday with a single post on Truth Social yesterday. It sparked a market rally of almost 10% in the S&P 500.
- The “Reciprocal” Tariff rate will now be 10% for every country other than China. That is much more in line with effective tariff rates the U.S. faces. Not truly “reciprocal” but close enough.
- The tariffs won’t go in effect for 90 days, giving time to negotiate. My view is that many countries would have reduced tariffs via negotiations anyways. Tariffs are only one part of the reason exports to various countries remain below U.S. imports (country size, GDP per capita, tastes, and other rules play a large role in trade deficits).
- China does have much larger tariffs than before and they are now in place.
Had we done this on “Liberation Day” I think stocks would have sold off a touch. The tariff rate was close enough to reciprocal that markets would have digested it (I still think true reciprocal would have been better, as it was priced in, but this was close). The 90 days makes a lot of sense as it gives time to actually negotiate, and for importers to think through alternatives (if they need).
But, with the rates China has applied to them, we have raised U.S. overall tariff rates quite a lot since China is a large exporter.
The Do-Over also reduces the risk that Europe or other countries retaliate with tariffs targeted at services (i.e. tech). That is a big deal.
Yesterday’s rally leaves the Nasdaq almost back to its pre-Liberation Day levels. The S&P 500 and Russell 2000 are a bit further away.
My view is that had this policy been announced originally, we would have had a small sell-off as China would have been hit, but no one else would have seen material tariffs, and most would have negotiated anyways. So, should we be back here?
- We don’t know what the deals will look like. At the time of Liberation Day, the broadly held view was that the U.S. wanted a level playing field. So matching tariffs, or even 0 tariffs. Given all the tariff news and headlines we’ve had over the past week or so, it is unclear that the goal is just that. Is the goal to reduce all sorts of trade barriers? Is it to isolate China (which had been the original thought here at Academy from Day 1 – which hadn’t played out that way). I expect tariff deals will include quotas to buy American made goods and may have clauses limiting what can be done with China. If things like that are added, will it make deals more or less feasible? Expect deals, but I think weak, low per capital GDP nations, will readily accept a lot of terms. It is unclear yet, what some other nations will accept. Reduced tariffs, to me, is relatively easy, and was achievable without all the drama. Beyond that, it may get tricky, though there is flexibility, I’m sure at most nations.
- Would China have pushed back so hard if only they had been targeted. It is clear that Xi has decided to play a much different game this time around. Would they have been as aggressive if they had been singled out on day 1? If not, then they fell into a “trap”. If so, then we still need to figure out what they are up to? China has an agenda here too, and we now can focus on figuring out what that is. The Chinese tariffs are meaningful for the U.S. economy any way we slice it.
- We have also seen fragility in bonds – both treasuries and corporate debt. That is new and likely played a role in the announcement of the pause. The admin seemed very comfortable letting equities slide, but far less comfortable when the bond market started cracking. It likely forced the timing of this pause (assuming they were planning on a pause anyways, which they might not have been). Capital flows were definitively out of the U.S., will that stabilize or reverse?
- Every country has some degree of frustration with the methodology. Can we go back to “normal” or will countries do deals, but try and figure out alternatives? Probably, which is why the admin might add clauses about trade with other countries, which might make the deals more difficult.
My take is yesterday’s rally got us into the right zone as to where we would be had this been the original deal on Liberation Day. I’d err to the side that we might be at the high end of the range, and that seems to be what the market is telling us at the moment as stocks are down 2%.
Now we can get back to “normal” business (at least until some new major headline hits the tape).
In what direction is the economy is headed? I still think weak, though less weak, less quickly after yesterday’s change. More opportunities for positive developments.
It is much easier to be bearish bonds again though. The only real budget item that we seemed to get in the last week (now that tariff revenue is delayed for everyone except China) is that the military spending is likely to grow. I was never a big believer in tariff revenue being major relief in the budget negotiations, so I’m not too worried about that aspect of the deficit plan. But we need to see progress on that. I think it is probably a good sign that DOGE seemed to slow down the pace of announcements, as they are likely digging deeper and identifying things that can be changed.
The best news, from my end, would be a pivot to building out industries critical to national security.
Chips, energy, rare earths and critical minerals, ship building, pharmaceuticals are all things we need (I do think we can partner with countries, though I’m not sure if that is on the admin’s agenda or not). Launching plans to get those things going would be great and what I was hoping for from day 1.
Expect markets to be a bit less volatile in the coming days as the news comes in dribs and drabs, but be prepared for more potential market moving headlines (which is maybe why VIX hasn’t dropped as much as it normally would).
