Stock speculators continued to bet that the White House would back down or even remove most of its tariffs. The week before, President Trump issued harsh words against Fed Chair Jerome Powell. Last week, however, Trump conceded that he would not fire Powell.
This complete switch in so short a time implies that trade partners will face sharply lower tariffs. Nasdaq (QQQ), which is a forward-pricing machine for the economy, gained 6.4% last week. The S&P 500 (IVV) gained 4.6%. YTD returns are still negative for both indices. Investors could have earned over 4% in annualized interest income with cash.
What is next after last week’s rally?
Under the Biden Administration, stock markets benefited from the Inflation Reduction Act. The government consistently hired staff monthly, helping to create jobs. The lack of risk sent stocks to bubble territory. Investors are no longer ignoring valuation risks, while tariff escalation after “Liberation Day” became a negative catalyst.
The tariff rhetoric will move stock markets day-to-day. The 90-day pause will cause impatient traders to speculate on tariff negotiations. However, China is the trade partner that matters the most, followed by Mexico, Canada, and Japan. Those countries are unlikely to initiate trade talks. This uncertainty will give investors a chance to add to the 20+ Year Treasury Bond (TLT) at a discount.