@theMarket: Markets Falter on Tariff Threats, Weaker Jobs Data

The Aug. 1 tariff deadline has been pushed back again by Donald Trump, but only for a week. The latest non-farm payroll report for July was weaker, and both the May and June numbers were revised downward. Investors were not expecting that news, and stocks tumbled as a result.

 

The U.S. economy added 73,000 jobs, below the expected 104,000. It was enough to move up the unemployment rate to 4.2 percent. At the same time, May's job gains were revised downward from 144,000 to just 19,000 jobs, and June's number came in at only 14,000 job gains versus the initial report of 147,000. It is hard to believe that errors of this magnitude are unintentional.

 

The jobs data made the president's threats of even higher tariffs on numerous countries beginning Aug. 7 that much more worrisome. The week started positively on the trade front. After two days of positive negotiations between China and the U.S. in Stockholm, markets had expected that the Aug. 12 deadline for a resumption of massive tariffs would be extended. However, negotiators made it clear that the final decision would be up to President Trump, who has yet to agree to any extension.

 

A last-minute deal with South Korea produced an agreement for a 15 percent tariff plus a commitment to invest $350 billion in the U.S. Like all the other investment promises, the details and timelines for when and what remain fuzzy. Korean negotiators say that this agreement was a purely verbal understanding with nothing in writing.

 

Trump's Canada, Brazil, and India talks have still not been finalized, and the president continued to insist the Aug. 1 deadline won't be extended beyond Thursday evening. Yet, on Friday morning, the deadline has been extended again by one week. In the case of Mexico, he agreed to extend the completion of a trade deal by another 90 days.

 

As for corporate earnings this week, both Microsoft and Meta beat second-quarter earnings handily on Wednesday. They predicted a rosy future ahead for their efforts in cloud computing and AI. Meta shot up more than 11 percent as they beat earnings estimates and guidance for the year. Microsoft jumped almost 5 percent and joined Nvidia in a league of their own as both companies' market capitalization surpassed $4 trillion each. Neither Amazon nor Apple fared as well, and all these stocks gave back some of their gains on Friday.

 

By Thursday, the seven largest U.S. companies had reached a combined market value of $20 trillion. Earnings for these companies have generated nearly $600 billion and now account for 30 percent (up from 8 percent 15 years ago) of the S&P 500's combined $2 trillion in net income.

 

The seven are trading for 33.7 times current earnings and have pushed the overall price/earnings of the market to more than 27 times. The capital expenditures at Microsoft, Apple, Amazon, Google, Meta, and Broadcom are consuming a significant portion of the cash they earn from operations, and Nvidia is a major beneficiary for some of that capex.

 

Overall earnings continue to beat estimates and have, until now, added fuel to the rally that seemingly never ends. Until Friday, investors have been looking past the tariff issues, expecting another TACO at the last moment. It helped that in the previous two weeks; the U.S. negotiated a framework for deals in both the European Union and Japan.

 

In addition, they have seen little evidence year to date that tariffs have had any impact on economic growth, and neither has the Fed. This week's FOMC meeting was a disappointment because the Fed is still insisting that it needs more data before deciding to cut interest rates. The jobs report for June may change that perception, at least when it comes to employment.

 

Over in the bond market, the U.S. Treasury announced it will need to raise $1 trillion in the three months to September just to keep the government running. That does not account for any of the new spending authorized by Congress in their recent tax and spending bill. Much of that fund raising will be targeted at bills and notes between a week and a year while keeping the size of its auctions of longer-dated bonds steady.

 

This is a continuation of the strategy under former U.S. Secretary of the Treasury Janet Yellen. It is a ploy to keep long-term interest rates from shooting through the roof as Congress spends more and more. The risk is that each time that this short-term debt matures, which is at least once a year, it must be replaced by new debt issued at current interest rates. If rates were to rise, the Treasuries debt burden would rise with it.

 

I urge readers to read my recent two-part series  on fiscal dominance, "What is really behind the move to replace Jerome Powell." It will give you an understanding of why it is critical that the administration has more control over the Federal Reserve Bank.  

 

As readers know, I have been warning that stocks were overextended and in need of a timeout. We began that pullback this week. Before it is over, we could see a 4-5 percent decline in the S&P 500. I expect a few more days of volatility as investors figure out how serious Trump's new tariff deadline could be.

 

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.