@theMarket: Fed Disappoints, Markets Swoon, While Tariff Talks Continue

On Thursday, investors hoped that Fed Chair Jerome Powell, speaking in Chicago at the Economic Club, would assure markets that he would backstop any downside from President Trump's policies. They were disappointed.

 

Even worse, he said, "The level of tariff increases announced so far is significantly larger than anticipated, and the same is likely to be true of the economic effects, which will include higher inflation and slower growth."

 

The fact that the leader of the world's most powerful central bank seemed to confirm the worst fears of investors triggered another $1 trillion sell-off in equity markets. The president quickly posted his displeasure at the central banker's comments on social media stating that "Powell's termination cannot come fast enough!"

 

All week, traders monitored every word coming out of the White House. Their algo programs immediately translated any news into buy and sell programs. That vaulted markets up or down in seconds with billions of dollars riding on words like "maybe," "positive," "unhappy," etc.

 

The typical retail investor is no match for this kind of volatile trading. Those who try are chopped up in pieces. Adding to the tariff tensions, the first quarter earnings season is underway. Just about every analyst is expecting earnings estimates to go lower and many companies to pull yearly guidance.

 

While the big banks reported good earnings, the number one market stock, AI semiconductor darling, Nvidia, surprised the market by announcing a $5 billion charge to income due to the government's future restriction of its popular H20 chip sales to China. That sent the stock price of Nvidia down by 10 percent overnight.

 

At the same time, the Trump administration increased China tariffs again to 245 percent. It also revealed that it is negotiating with 70 countries to disallow China to transship its goods to the United States. None of that seemed to phase Chinese internet stocks which gained more than 1 percent on the news.

 

Overall, market participants have still not given up their buy-the-dip mentality even though the markets' fundamentals and the economy are steadily deteriorating. The market trades at a market multiple of 23 times earnings right now with earnings for the year forecasted to rise by 10 percent.

 

If economists and the Fed are right, and the economy slows while inflation rises, does this kind of valuation make sense? If we experience a two-quarter recession this year, history tells us that a mid-teens earnings ratio would be appropriate. If so, we have not seen a decline in the lows in this market.

 

Investors, however, are hoping that at any moment, the White House will announce breakthrough deals with several countries. I believe there is a concerted effort by the administration, after the major meltdown of two weeks ago, to provide a continuous stream of positive, short-term narratives on deals they are negotiating to support markets. This week, Japan topped the list of "positive" meetings trumpeted on social media, while the lack of progress on the European front was not mentioned.

 

One of the only places that investors have been able to see gains is in gold and silver mining stocks. As readers know, I have been positive in this area for months, but I would caution those with a bout of FOMO to resist the temptation to chase these investments right now. This is a crowded trade in need of a serious pull-back before considering new purchases.    

 

Where does that leave us in the overall markets? Hoping for a breakthrough is not an investment strategy, nor is waiting for another 9 percent one-day market spike. We are all Trump-dependent and will continue to be. The longer these tariff negotiations take, the lower the markets will go.

 

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.