@theMarket: Markets Forge Ahead on Holiday-Shortened Week

Congress passed the tax and spending bill, and the president signed it into law on July 4 but traders have already moved on. They are laser-focused on the July 9 tariff deadline. It doesn't look good.

 

As the holiday weekend begins, President Trump warned the nation that he will be sending letters to 10 or 12 countries starting Friday to notify them of the tariff rates they will face as of August 1. He claimed that by July 9, all nations "will be fully covered. They'll range in value from maybe 60 percent or 70 percent tariffs to 10 percent and 20 percent tariffs."

 

Equity futures, which are open on the July 4 holiday for a half-day, indicate that the indexes were down a little over half a percent on the news after gaining a little more than that by Thursday's close. While these letters appear to be an escalation in Trump's trade war, he has also postponed the deadline for tariff implementation once again, until Aug. 1.

 

Given his track record, most traders are looking to the crypto-based prediction market, Poylmarket, to gauge the chances he will follow through. As of Friday, the odds that Trump will remove most of the reciprocal tariffs before the deadline are 56 percent. Look out below, if that doesn't occur. Of course, in the event of a significant sell-off in the stock or bond market, I expect Trump and his billionaire crew to rapidly change their tune on tariffs as they have done in the past.

 

A deal with Vietnam was announced on Wednesday, marking the second such agreement to date. Imported goods from that country will face a 20 percent tariff, while transshipped goods, those shipped from Vietnam, but originating in another country (like China), will face a 40 percent tariff. U.S. exports to Vietnam would not face a tariff. That is good news, but small potatoes (U.S. exports total $13 billion) compared to what we export to other countries in the European Union ($592 billion) or Japan ($79 billion). The president has already said he doubts a deal with Japan is forthcoming.

 

Regarding the passage of Trump's spending bill, aside from the fact (denied by its legislators) that this so-called "beautiful" bill will increase the U.S. debt load by $3 trillion to $5 trillion over time, it will once again be an exercise in redistributing wealth from the poor to the wealthy. Remember, taxes under this bill will remain the same. They just won't go back up because the bill extends the status quo. There are a few minor exceptions, such as no taxes on tips or overtime for some Americans, and seniors receive a break through tax credits.

 

More than two-thirds of the total tax cuts will continue to benefit those with annual incomes above $217,000. Those making $1.1 million or more will garner one-fourth of the tax benefits. However, the real issue for GOP politicians is the spending cuts. The deep cuts in Medicaid and SNAP programs disproportionally impact working-class voters (defined as those without a college degree). 

 

Those are the voters who put both Donald Trump and a slim majority of Republicans in Congress in power. That is the main reason, aside from the cost of the bill, that the GOP, despite their majority in both houses, have struggled to pass this bill.

 

In 2023, Republicans represented 56 of the 100 lowest-income districts in the House. Republicans are counting on Trump's ability to sway the public to disregard the fine print in the bill. We all know why. Republican politicians worry how 20 million or more Americans, who face a deep decline in their social safety-net programs, will feel about their elected representatives come election time. To avoid that, Republicans deferred their most painful spending cuts until after the midterm elections.

 

In the meantime, the pressure on Fed Chairman Jerome Powell to cut interest rates continues unabated. The spate of weaker inflation data, combined with a recent weakening in economic growth, has prompted more players to follow the president's lead in calling for cuts as early as July. The June labor report punctured that narrative. The non-farm payrolls report was an upside surprise, as the U.S. economy added 147,000 jobs, exceeding the 106,000 that economists had expected. That pushed the headline unemployment rate down to 4.1 percent. It suggests that there is no need for a rate cut at this time.

 

My higher-end target on the S&P 500 Index was exceeded this week. As readers are aware, I have been anticipating a bout of profit-taking in July. Next week, we could see a pullback based on Trump's latest tariff threats. A 2-3 percent sell-off in the averages is possible, which may be a chance for the markets to refuel from overbought levels.

 

And yet, I see no real signs that the bulls want to relinquish their hold on the markets. Seasonally, July is a good month for markets, with an average gain of around 2 percent. In addition, the AAII investor sentiment survey is not nearly as euphoric as it should be, given a 28 percent gain in the stock market from its lows.

 

While there is no sure way to predict an interest rate cut in July or another extension of tariff delays after Aug. 1, either occurrence would send markets higher, possibly into what is called a "blow-off top." If so, this could catapult the S&P to 6,350-6,500 in a relatively short time. As such, over the next two weeks, anything could happen so strap in!

 

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.