@theMarket: Investors Regain Confidence as Tariff Fears Abate

The 90-day reprieve on tariffs has given markets a boost. This week, equity indexes briefly turned positive for the year. Are there more gains ahead?

 

Further upside in stocks is dependent on the next moves out of Washington. For now, tariff fears are on the back burner. Fewer tariffs imply less of a hit on the economy. That has convinced many brokers and money managers to backpedal on their recession predictions. Investor attention has now swerved to Congress and the passage of Trump's "Big Beautiful Bill."

 

The president's spending bill is beginning to take shape, although the time to passage continues to slip. The original idea was to extend the tax cuts of Trump's first term and reduce spending primarily by slashing Medicaid and "billions" in DOGE cuts. And, if possible, throw a few extra tax deductions to those in the country that need them the most. The House bill taking shape is a far cry from that idea.

 

If passed in its present form, the House Reconciliation package would add $5.2 trillion to the country's debt. Boost deficits over time to $3.3 trillion. Push annual interest costs on government debt to $2 trillion while increasing the debt-to-GDP ratio to 130 percent. And this is after $2.5 trillion in offsets are applied.

 

That is not what the bond market wants to hear. As such, is it any wonder that the yields on Treasury bonds have spiked higher in the last week? Whether this kind of legislation will ultimately see the light of day or saner heads prevail is what I am watching. Factions among the GOP are feuding on how much to increase the SALT cap on mortgage tax exemptions from the present 10 percent to some higher number. A handful of politicians from wealthy states threaten to torpedo the bill if they don't get their way.

 

It appears seniors will be screwed. Trump's campaign promises to end the double taxation on Social Security is out, although taxes on overtime may survive. So far, there is decidedly nothing beautiful about this version of the bill. It promises the same reward-the-rich and soak-the-poor legislation that has been popular among both parties for the last 40 years. Whatever the outcome, its passage will likely be a purely Republican affair, with Democrats abstaining. How that will square with voters in an era of populism remains to be seen. 

 

The Consumer Price Index and the Producer Price Index came in cooler than most expected for last month. The Street was looking for higher numbers, but readers know I had the opposite view. However, that trend toward weaker inflation numbers may have ended. The imposition of tariffs is already impacting prices.

 

Remember that the effective rate of tariffs, even if reciprocal tariffs were dropped, would still be 15.6 percent. That is the highest rate of tariffs (taxes) Americans will be required to pay since 1938. As such, higher inflation will show up in the numbers in the months ahead.

 

Consumer sentiment numbers are still falling even as the stock market climbs. The bulls believe that, at this point, Trump's tariff initiatives are nothing but bluster. In which case, there will be no recession nor decline in earnings estimates, and with Congress back to its old spending habits, the sky is the limit for equities. Many technical analysts are turning positive as well.

 

The bears, of which there are many, still cling to the idea that this three-week bounce in the averages is just that, a bear market bounce. They believe markets will roll over and re-test the lows or break them because of a tariff-crippled economy and rising inflation.

 

My guess is somewhere in the middle. I could see a new trading range develop with another 150-plus points tacked onto the S&P 500 Index, call it 6,050 to 6,150 on the high end. On the low end, 5,770 is the long-term trend line on this index. That seems about right as we await further developments on the tax bill, tariffs, and the economy.

 

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.