End of the Beginning

By: Michael Coolbaugh, Chief Investment Officer

*The following note is a partial sample of our weekly report. This was published for clients on April 1, 2025.

It was only fitting that March finished off with an insane intraday reversal given how eventful Q1 of 2025 has been. I’ll admit, when I sat down at my computer yesterday morning and saw the set-up, I thought it’d be best to hold off on our weekly report until today. Here’s why…

Over the weekend, the chorus has grown louder that the administration’s tariff policy will act as a major drag on growth. For us, this thinking isn’t new. In fact, we’ve been talking about this for several months now. Investors ignored it all throughout January. Denied it in February. And it was only in the closing days of March that people suddenly began to realize that the Trump administration is serious about its tariff policy.

Here’s the thing… Everyone was convinced that Trump’s apparent softening on tariffs with, “there will be flexibility” at the end of the second week of March, was a sign that the ‘Trump put’ was alive and well. Equities ripped higher into the underside of the 200-day moving average (at least for the S&P 500 and NASDAQ), only to get smacked in the face when President Trump moved forward with auto tariffs.

But what sparked such a vicious sell-off last Friday? Yields, all across the curve, fell and equities puked. To me, this wasn’t about the PCE data which actually came in slightly hotter than expected. No, the fact that bonds shrugged off this inflation print suggested that investors were finally becoming worried that the tariff threats were real. Perhaps it was President Trump stating that the auto tariffs would “remain in effect for the entirety of his term”.

All justifiable concerns. But here’s why we were tactically trimming some of our short exposure yesterday… I started to hear rumblings that “major HF traders” were concerned about the real possibility of a “crash”. Jim Cramer shared on CNBC that, “I can’t think of a dumber day to buy stocks than today.” Even the “expert macro strategists” all over FinTwit, who had been raging bulls throughout this entire decline because of “massive productivity gains” and “never bet against the USA”, were starting to acknowledge that the behavior between stocks and bonds on Thursday was a sign that growth fears are becoming a real concern.

Is a crash possible? Sure. What are the odds? I have no idea. But after the past four years, people have become conditioned to think of equities in binary terms - “straight up and to the right” or “crash”.

To me, the more painful scenario would be a miserable sideways-to-lower grind where true panic never really sets in. One where people continue to cling on to hope that tariffs won’t be as aggressive as the administration says. One where brief moments of optimism about “tax cuts” or “bank deregulation” will take people’s attention away from a slowing economy.

Why do I expect a slowing economy? Well, the data already suggests that economy was beginning to slow even before these latest tariff fears. But as I shared before, I do believe the tariffs will be implemented and there won’t be some sudden rollback because of a magical “Trump put” for equity prices. The reason being – this administration truly believes that tariffs are a way to generate revenue and cut into the deficit. Cut into the deficit that will allow them to extend tax cuts. This isn’t Trump 1.0 where tariffs were being used strictly as a negotiating tactic. There is a strong fundamental belief that tariffs are good, tariffs will drive investment here in the United States, and tariffs will generate massive amounts of revenue for our government.

The major difference between Trump 2.0 and Trump 1.0 comes from the people in his inner circle. During his first term, President Trump surrounded himself with the likes of Gary Cohn and Steve Mnuchin – two people who were staunch critics of tariffs. In this term, there’s very little question that Howard Lutnick, Kevin Hassett and Scott Bessent support Trump’s desire to implement tariffs (while Bessent has been an advocate of a more measured, gradual approach, he’s certainly not a voice strongly pushing against the use of them entirely).

But here’s the thing… Tariffs will raise prices. Those higher prices will cut into demand from a consumer that has already shown signs of being “tapped out”. Those higher prices will create a difficult balancing act for the Fed, who would love to be aggressively cutting at any sign of a slowdown. It’s why we’ve heard so many members preach the importance of patience and how “the current holding stance is the correct one.”

There’s also the uncertainty of all this. Sure, there are some large corporations that have thrown around large multi-year investment plans here in the United States. But for the rest of small- and medium-sized enterprises, there are very few alternative options. Here’s just a few brief quotes from the Dallas Fed Survey on the energy industry…

“The administration’s tariffs immediately increased the cost of our casing and tubing by 25% even though inventory costs our pipe brokers less. U.S. tubular manufacturers immediately raised their prices to reflect the anticipated tariffs on steel. The threat of $50 oil prices by the administration has caused our firm to reduce its 2025 and 2026 capital expenditures. “Drill, baby, drill” does not work with $50 per barrel oil. Rigs will get dropped, employment in the oil industry will decrease, and U.S. oil production will decline as it did during Covid-19.”

“I have never felt more uncertainty about our business in my entire 40-plus year career.”

“Uncertainty around everything has sharply risen during the past quarter. Planning for new development is extremely difficult right now due to the uncertainty around steel-based products. Oil prices feel incredibly unstable, and it’s hard to gauge whether prices will be in the $50s per barrel or $70s per barrel. Combined, our ability to plan operations for any meaningful amount of time in the future has been severely diminished.”

You see, tariffs don’t just raise the cost of imported products. If a domestic supplier knows he/she can raise prices by 20% and still be cheaper than foreign competitors, the natural reaction function is to do so immediately. Why wouldn’t you raise prices to capture a larger profit margin?

What’s more is people still believe April 2nd to be more of a “beginning of the end” to tariff drama instead of the “end of the beginning.” While much of the focus has been on the ability for other countries to cut tariffs and thus allows the US to reduce reciprocal tariffs, very few expect retaliatory tariffs from our trading partners. What happens if Canada, as Mark Carney has stated, does indeed implement reciprocal tariffs? What if Europe slaps additional tariffs on US tech’s “digital services”? Does President Trump ratchet up tariffs on both countries? In my opinion, April 2nd is only the starting gun.

And then there’s the uncertainty that we talked about – not only with respect to tariff policy but on so many other objectives. The administration’s tariff policy completely flies in the face of their plan to lower the price of oil to $50/bbl. And their objective of lowering the price of oil to $50/bbl is entirely contradictory with their mantra of “drill, baby, drill”.

So, yes, it does appear that some investors are finally starting to become concerned with the economic outlook. But all throughout this decline, we’ve only had two major banks lower their year-end targets for the S&P 500 Index (Goldman Sachs and Barclays). It is worth noting, however, that both of their targets still remain well above current levels (after their latest revision, Goldman has joined Barclays with a 5,900 year-end target).

What’s more is the fact that earnings expectations have not budged in the slightest to the downside. If there has been a ‘growth scare’, it’s only been in the contraction of multiples, which still remain well above historical standards. In other words – if we start to see strategists reduce their EPS estimates for 2025/2026, due to the idea that tariff policy will act as a drag on growth, then equities are more expensive than they appear, and further multiple contraction will only put additional downward pressure on equity prices.

And while credit spreads have finally started to show the slightest signs of stress, there is one thing we’ll be watching over the months ahead. As Bloomberg’s Anna Wong points out, approximately 10 million people may experience a major negative hit to their credit scores once the Trump administration allows the Covid-era student loan forbearance to expire. This is another one of those old tailwinds that is now being turned into a headwind as a result of a significant change to fiscal policy. Here’s the research article from the New York Fed.

Ok, ok, these are all things we’ve been talking about for quite some time. So, why in the world were we trimming short exposure yesterday? Well, part of it had to do with all those anecdotal sentiment things I mentioned at the outset. It’s also a tactical measure and not some sudden change in a directional view. But let me expand on some of the data-related items that supported this decision.

For starters, we have a positive momentum divergence on both the S&P 500 and NASDAQ after yesterday’s test of the March 13th lows. Yesterday’s strong reversal to the upside is a welcome sign for bulls hanging on to hope. We also have a positive breadth divergence across all three timeframes (short-, intermediate-, and long-term). We also have the 10-week moving average of “Bears” in the American Association of Individual Investors printing +2 standard deviations above the historical average.

Lastly, we have a positive divergence between the VIX Index and the S&P 500 Index following yesterday’s action. In this case, we saw the VIX only print a high of 24.8 during yesterday’s early-morning sell-off, while the S&P 500 Index and NASDAQ both tested their March 13th lows. For reference, during the week of the March 13th low, the VIX Index hit a high of 29.57.

And that brings me back to something I shared on the last page. Because people still firmly believe that April 2nd is the “beginning of the end”, I wouldn’t be surprised to see an attempt at “sell the rumor, buy the news” (the step-child of “buy the rumor, sell the news”) in equity prices. Where traders throw a bit of a short-term tantrum ahead of “Liberation Day” because they finally realized that the Trump administration is serious about its tariff policy. If investors do believe that April 2nd will be the end of major uncertainty, it’s entirely possible that we see another relief rally.

But if everything that we’ve laid about before, with respect to fiscal headwinds and the possibility of a prolonged tariff war (as laid out in the FT article at the end of this report), does indeed persist; any rally attempt will likely be another solid opportunity for selling.