April 2nd: tariff day.
Paid subscriber analysis
Q1 of 2025 is all but done. And boy was it a turbulent start of the year. We rode a rollercoaster from new highs (>6,100 for SPX after inauguration day, with markets at peak optimism), to the DeepSeek-driven sell-off of AI tech stocks, which was quickly followed by Trump’s first announcement of tariffs. And then the rollercoaster intensified. Each week we saw a slight rebound (even to newer highs at one point in mid Feb) and then a sharp move down following a fresh tariff announcement or some other policy surprise from the Trump administration. Currently we are still rangebound; SPX moved up from the 5,600-5,700 band to the 5,700-5,800 band, as we suggested it could last week.
Eventually, GDP data got worse on tariff expectations (GDPNow went down from +3 to -2% (or 0.2% adjusted) in this period), and the administration started sending clear signals that they want to see interest rates - and by that the 10Y yield - go down sharply. Either the Fed does it on its own, or the Treasury pushes their hand by causing a recession.
And just like that we went from soft landing (early Jan) to hard landing (early Feb) to recession (late Feb/Mar) pricing. In a matter of two months recession probabilities went up significantly, and investors are now anticipating the Fed to cut rates as a means of accommodative monetary policy for recession times. What a dramatic shift of market environment from what we’ve seen over the past two years.
Initially, it was looking similar to 2018, the first time Trump started the trade war with China. But now, it’s looking increasingly more like 2022. Sharp selling, pause, and then more selling. As we mentioned last time, the next big market mover will be earnings results in April. Bad forward guidance, due to the pricing in of tariff expectations, would signal that the selling is far from over, and that this correction might be a 20%-er (i.e. a bear market signal).
But before that, we need to survive April 2nd, tariff day!
This is when tariffs come into full effect. On Mexico, Canada, China, and the EU, for a variety of products; from cars, steel, aluminum, semiconducters, pharma products, etc.
What can we expect coming into April 2nd, and especially after it? In other words, what is priced in?
There are three potential scenarios:
Trump reverses his decision once again and pulls out of tariff plans.
Trump declares victory by “making a deal” which reduces all tariffs currently imposed on the US exports, meaning he doesn’t need to hit back with retaliatory tariffs on other countries.
Tariffs imposed as planned, to a full extent. No deal.
Clearly, scenarios 1 and 2 are bullish assets (equities in particular), while scenario 3 is very bearish.
Very difficult to say which of these could prevail, but what we can do is observe reactions prior to April 2nd. If a deal is to be made, the US public is likely to find this out from one of the trading partners (likely over the weekend). This would induce some bullish frontrunning coming into the event, starting on Monday. But if there is no leak before, no sign of a deal being made before April 2nd, then the decision really boils down to 1 or 3. And judging by Trump’s behavior thus far, scenario 3 (full tariffs) is becoming more and more likely. The longer we linger without a deal, the more likely full tariffs get implemented.
What does this mean for positioning coming into next week?