Animal Spirits to Animal\u00a0Hibernation<\/h2>\n
\n \t\tApril 1, 2025 at 5:03 pm<\/a><\/em>\n\t\t \t\t \t\t<\/p>\n Investor mood or sentiment can change rather quickly. Immediately after the 2024 presidential elections, positive animal spirits catapulted the stock market higher due to hopes of stimulating tax cuts and deregulation legislation. However, those warm and fuzzy feelings soured last month, as investor focus shifted to on-again, off-again tariff talks, and stagflation concerns, which have converted animal spirits into gloomy feelings of hibernation.<\/p>\n As a result, the advancing bull market took a breather and transformed into a weary bear during March. For the month, the S&P 500 (-5.8%), NASDAQ (-8.2%), and the Dow Jones Industrial Average (-4.2%) all fell significantly in the wake of tariffs, inflation, and recession worries.<\/p>\n Lovely Liberation Day or Tariff Trouble?<\/strong><\/p>\n Since the President took office in January, he has announced, reversed, and implemented tariffs across a wide range of countries and sectors, including China, Canada, Mexico, the EU, Colombia, Venezuela, steel, aluminum, oil, automobiles, digital services taxes, and more.<\/p>\n The day of reckoning begins on April 2nd<\/sup>, designated Liberation Day by the president. This is when the president and the White House officially announce global reciprocal tariffs on foreign countries in an attempt to reverse the nation\u2019s large trade deficit (see chart below<\/mark><\/a>) and bring manufacturing back to the United States. For example, if Germany subsidizes BMW cars sold in the U.S. while simultaneously placing tariffs (i.e., additional taxes) on American Ford Explorers sold in Germany, the president wants to impose equivalent reciprocal tariffs on those same BMWs sold in the U.S. in an effort to level the trading playing field. On the surface, a $131 billion trade deficit sounds very significant, but when compared to a $30 trillion economy (Gross Domestic Product<\/mark><\/a> \u2013 GDP), this negative trade balance represents less than 0.5% of GDP \u2013 effectively a rounding error. I have previously written how tariffs represent more of a molehill than a mountain (see <\/mark>Tariff Sheriff<\/mark><\/em><\/strong><\/a>), in part because consumer spending and services make up the vast majority of our country\u2019s economic activity, whereas trade and manufacturing are relatively smaller segments.<\/p>\n Source:<\/strong> Trading Economics<\/em><\/p>\n Driving home the point that tariffs are more bark than bite, Senior White House trade and manufacturing counselor Peter Navarro recently stated the 2025 tariffs could add $700 billion<\/mark><\/a> annually to U.S. revenues, including $100 billion from the\u00a0recently announced 25% auto tariffs<\/mark><\/a>. Many economists believe this collection estimate is too optimistic. However, even if this target is achievable, $700 billion only represents a measly 2% of overall GDP.<\/p>\n Tariffs = Recession or Stagflation?<\/strong><\/p>\n With the recent stock market downdraft and growing concerns related to tariffs, some economists and pundits are raising the probability<\/mark><\/a> of a recession and the possibility of inflation accompanying an economic downturn (i.e., stagflation).<\/p>\n Economic data should clear some of the fog. Fresh employment numbers will be released this Friday, which should shine some light on the health of the economy. Irrespective of this month\u2019s results, the most recent 4.1% unemployment rate (see chart below<\/mark><\/a>), though slightly higher over the last two years, does not strongly indicate a recession.<\/p>\n Source: <\/strong>Trading Economics<\/em><\/p>\n Other \u201chard\u201d data, such as GDP, also suggest a slowing economy rather than a recession. For instance, a recent survey of 14 economists estimates the economy is growing at a paltry +0.3%<\/mark><\/a> rate in Q1 \u2013 2025 versus +2.3% in Q4 \u2013 2024. Data is continually changing, but if a looming recession were imminent, corporate earnings would likely be trending downward, not upwards, as evident in the chart below<\/mark><\/a>.<\/p>\n Source: <\/strong>Yardeni Research<\/em><\/p>\n Tariff Inflation Has Yet to Arrive<\/strong><\/p>\n There is no doubt tariffs function as a tax hike on consumers because U.S. companies that pay the tariffs on imported goods are eventually forced to raise prices to maintain profit margins or limit margin degradation.<\/p>\n Nonetheless, inflation did not spike under President Trump\u2019s first term. Even if the president\u2019s new policies result in more aggressive tariff actions this go-around, inflation will likely remain in check due to the point mentioned earlier \u2013 imported goods represent a small percentage of overall consumer and business purchases.<\/p>\n Tariff implementation is just beginning, so only time will tell how pervasive inflation will \u00a0become. However, what we do know now is that inflation has declined dramatically over the last couple of years and has not yet spiked (see Consumer Price Index chart below<\/mark><\/a>).<\/p>\n Source:<\/strong> Calafia Beach Pundit\u00a0<\/em><\/p>\n Where Could I Be Wrong?<\/strong><\/p>\n I have explained how some of the lagging \u201chard\u201d data does not signal recession or stagflation, but what could I be missing? For starters, some of the leading \u201csoft\u201d data (e.g., surveys) indicate various cracks in the economic foundation are forming.\u00a0 Take the recent Consumer Confidence data (see chart below<\/mark><\/a>), which has weakened dramatically from pre-COVID and even post-COVID levels.<\/p>\n Source: <\/strong>Trading Economics<\/em><\/p>\n It\u2019s not just consumers who are feeling uneasy about the economic environment; businesses are as well. Another soft data point flashing red is the NFIB Small Business Uncertainty index, which recently reported its second-highest reading in 48 years (see chart below<\/mark><\/a>). Even if my argument that tariffs are too small to materially impact the economy holds, if the psychological effects of tariff uncertainty paralyzes consumer and business economic activity to a standstill, then tariffs could indeed become a substantial factor.<\/p>\n Source: <\/strong>National Federation of Independent Business (NFIB)<\/em><\/p>\n What Comes Next After Liberation Day?<\/strong><\/p>\n Liberation Day is unlikely to trigger an immediate and sustained V-shaped recovery in the stock market because international trading partners will be forced to announce retaliatory tariffs in response to President Trump\u2019s reciprocal tariffs, potentially leading to additional reactionary tariffs by the U.S.<\/p>\n Additionally, the reciprocal tariffs announced on April 2nd<\/sup> will likely serve as a starting point for subsequent negotiations with trading partners. Without a comprehensive resolution, investor sentiment will likely remain somewhat unresolved and unsettled. Regardless of your views on the size and impact of tariffs, Liberation Day will at least bring some clarity and reduce the uncertainty surrounding the current murky and chaotic environment.<\/p>\n The multi-year bull market continued its charge after the presidential election, but investor sentiment has weakened the bull run due to tariff uncertainty. In response, the excited bull has temporarily turned into a sleepy bear. Depending on how these tariff events unfold, we will soon find out whether Liberation Day will awaken the bear to hunt for bulls or send it into deep hibernation.<\/p>\n www.Sidoxia.com<\/strong><\/mark><\/a><\/p>\n Wade W. Slome, CFA, CFP\u00ae<\/strong><\/p>\n Plan. Invest. Prosper.<\/em><\/p>\n This article is an excerpt from a previously released Sidoxia Capital Management complimentary newsletter (April 1, 2025<\/mark>).\u00a0Subscribe Here<\/mark><\/a>\u00a0to view all monthly articles.<\/p>\n DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in F or any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on the IC Contact page.<\/p>\n \n\t\t\tEntry filed under: Earnings<\/a>, economy<\/a>, Financial Planning<\/a>, Fixed Income (Bonds)<\/a>, Government<\/a>, inflation<\/a>, Interest Rates<\/a>, International<\/a>, Politics<\/a>, Stocks<\/a>, Trading<\/a>. Tags: bonds<\/a>, consumer confidence<\/a>, CPI<\/a>, economy<\/a>, exports<\/a>, Federal Reserve<\/a>, GDP<\/a>, imports<\/a>, inflation<\/a>, interest rates<\/a>, investing<\/a>, liberation day<\/a>, Politics<\/a>, recession<\/a>, reciprocal<\/a>, Sidoxia<\/a>, small business<\/a>, stagflation<\/a>, stock market<\/a>, Stocks<\/a>, tariff<\/a>, tariffs<\/a>, trade<\/a>, trade balance<\/a>, uncertainty<\/a>, unemployment<\/a>, Wade Slome<\/a>.\t\t<\/p>\n<\/p><\/div>\n\n","protected":false},"excerpt":{"rendered":" Animal Spirits to Animal\u00a0Hibernation April 1, 2025 at 5:03 pm Investor mood or sentiment can change rather quickly. Immediately after the 2024 presidential elections, positive animal spirits catapulted the stock market higher due to hopes of stimulating tax cuts and deregulation legislation. However, those warm and fuzzy feelings soured last month, as investor focus shifted […]<\/p>\n","protected":false},"author":1,"featured_media":174955,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[96],"tags":[1330,38132,16238],"dealstore":[],"offerexpiration":[],"class_list":["post-174954","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investing","tag-animal","tag-hibernation","tag-spirits"],"yoast_head":"\n![\"\"](\"https:\/\/investingcaffeine.com\/wp-content\/uploads\/2025\/04\/tariff-bear.png?w=518\")
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