Markets in turmoil
Since Trump became president, there have been a number of uncertainties impacting the global markets negatively, in particular tariffs and threats of upcoming tariffs. There has also been uncertainty and disruptions due to the DOGE’s firing of government employees and several cuts in the federal spending cycle. This has created additional volatility in the markets.
Long-time students of the markets understand well that drawdowns and corrections are not only normal parts of bull markets, but healthy for the bull to extend its life. Wise investors not only expect them, but they also seek to capitalize on them to rebalance or deploy capital. To solidify this point, during the past 80 years, the Dow Jones Industrial Average Index corrected between 5% and 10% on 43 occasions with an average recovery period of three months. It corrected between 10% and 20% on 15 occasions with an average recovery period of eight months. The latest market angst, as of mid-March 10, has markets off between 5% and 10% from mid-February all-time highs.
The noisy headlines around geopolitical, trade, and fiscal policy have fueled a heightened state of uncertainty. The good news up to this point is that the actual delivery of policies has been milder than the more extreme measures proposed. Certainly, the economic data in what we call soft economic indicators like surveys, confidence, and sentiment have slipped in the first quarter from high levels to start this year. However, we have yet to see sentiment spill materially into the hard economic data, like actual consumer spending, capital expenditures, and company earnings.
For the economy specifically, the pace of hiring has been solid, spending on capital equipment and inventories has been reversing from last quarter’s drag as many companies scrambled earlier this year to make purchases ahead of impending U.S. tariffs on global trade partners, and green shoots indicating a lift in manufacturing growth have emerged for the first time in several years. A slowing in service sector growth, cooling labor income gains, and a consumer running against the cold wind of several years of price increases across numerous spending categories all appear to be denting first-quarter gross domestic product growth.
The on-again, off-again tariff increases applied to Mexico, China, and Canada, our country’s three largest trading partners in that order, have equity prices settling back to levels we last saw pre-election in the fall of 2024. Tariffs are not new, and even before the latest flurry, the U.S. Commerce Department lists just over 12,500 current products tariffed across 200-plus global trading partners.
The administration is using tariffs somewhat uniquely as short-term tactical tools to accomplish longer-term geopolitical goals. However, the administration does have a long-standing belief that tariffs are both a means to an end and an end unto itself. Tactical tariffs have been and likely will continue to be applied and rolled back based upon how well they accomplish key goals and move key metrics. Other tariffs may prove more durable, supporting priorities to close long-standing trade or capital account deficits and reshore key supply chain and important industrial complexes.
Similar shifts appear underway in fiscal policy from efficiency-enhancing to austerity-inducing proposals. The newly formed Department of Government Efficiency (DOGE) has garnered much attention in both its tact and actions. It remains to be seen what longer-term impact it may have on the fiscal policy path, but to put some numbers behind the impact thus far, its own website lists $105 billion of savings, which is just over 1% of 2024 fiscal outlays of the government. Federal employee job layoffs have been material, affecting over 60,000 employees across almost 20 different government agencies. Together with the 75,000 government employees who self-selected an early retirement offer; the total represents roughly 6% of the roughly 2.2 million federal civilian workforce and could be a catalyst for higher unemployment numbers in coming months. While there is much debate about the process, the focus on spending cuts should not be surprising. If you look at federal outlays as a percentage of GDP, they have been rising for 15 years, from 13% of GDP to 22% of GDP. This rise in federal spending has been a substantial contributor to inflation.
The bond market has also been volatile. Interest rates have been caught in a tug of war between caution from lower growth expectations and inflationary pressures from policy priorities. The Federal Reserve will have a challenging time materially lowering interest rates.
Five years ago to the month, the global economy experienced a set of powerful shocks by way of a pandemic, supply-chain disruptions, and commodity price pressures. Then three years ago to the month, as inflation soared, the Fed initiated a furious pace of monetary policy tightening that took us through the summer of 2023. Two years ago in March, three regional banks failed, sending markets spiraling downward. Here we are in March again, and we’re seeing the beginnings of what could be a seismic re-ordering of geopolitical forces and global trade policy. Despite all these challenges, the U.S. economy and markets have consistently risen above the rest of the world.
Historically, in times of uncertainty, prices have provided the best opportunities, and wise investors keep pedaling. Trump will continue to be unpredictable, and the market will eventually price in that factor. The government is doing a fine job trying to find saving and create more efficiencies and the U.S. is truly seeking fairness in the global trade system. They will soon turn to Europe, and this will impact the global economy more than China, Mexico and Canada, but it is still the right move from the Trump administration. Europe, and particularly Germany, have been taking advantage of the U.S. for too long.