Last week some feared a trade war, a recession, and a bear market. This week all of that has been forgotten as the S&P 500 was up 0.45% on Thursday which was the day of the tariff announcement.

President Trump announced that a 25% tariff on steel and a 10% tariff on aluminum would be levied in the next 15 days. Canada and Mexico will be excluded while NAFTA changes are being negotiated. Other countries feel they deserve to be exempt as well. Trump shined a positive light on Australia because America has a trade surplus with it. The more exemptions the better, as trade will grow quicker without tariffs. The most shocking report, which counteracts everything we heard last week, was that all countries are invited to negotiate exclusions from the metals tariffs.

For the first time during Trump’s presidency, Wall Street feared the rhetoric in the media as stocks sold off. In 2017, many people complained that stocks never declined when a political storm took place. Now we know why stocks don’t normally have big reactions to political news. There’s usually a lot of exaggerated bluster before action, which isn’t that extreme, takes place. Politicians generally act at a snail’s pace as evidence by the fact that the Brexit still isn’t complete.

The chart below really fires home the point that the tariff fears were irrational. As you can see, the Smoot-Hawley tariffs were near 60% while they are near 5% now. A small increase shouldn’t be compared to Smoot-Hawley. The main reason people made that comparison is because it’s the last time tariffs went up. However, it’s the equivalent of comparing the February correction to the financial crisis.

Call For A 40% Crash Dominates Chatter

I like to discuss the topics investors are focused on to give clarity on the latest news events. Usually the focus is on what policy makers are doing or the latest economic data, but sometimes it’s a market call. The market call, which was one of the top stories in the financial press on Thursday, was JP Morgan’s co-president Daniel Pinto’s forecast that a 20%-40% decline could occur in the nest 2-3 years. He then said a recession in late 2019 was possible. This is essentially my call because it looks like the yield curve will invert in the next 12-18 months.

This is a clickbait article because the title only includes the 40% correction call without mentioning the full range of outcomes. Some people dismissed it because of this. Usually, top financiers don’t want to scare the market. They also don’t want to give away the secret sauce on how they make money. If you had a winning way to make money, would you tell everyone about it? Therefore, this interview signals that the consensus is the economy is late in the cycle. Many bears complain that Wall Street never foresees recessions, but that’s not true. Wall Street is sometimes too bearish.

To be clear, the fact that a recession occurring in late 2019 is consensus, doesn’t mean it’s the wrong bet. It simply means, sometime in 2019 many people will be moving to more conservative styles or shorting the market if the belief holds. Stocks might fall in anticipation of this. It will be an amazing buying opportunity if the fear is unwarranted. It’s possible I will be bullish because I’m open to following whichever thesis is the most rational.

Survey Of Forecasters

Let’s look at the consensus forecast for the major economic figures. As you can see, the unemployment rate is expected to gradually fall into the high 3% range. This is an expectation that the labor market stays steady. PCE inflation is expected to hit 2%, but then fall below that mark by the end of the year. If inflation ends up being this steady, then stocks will rally and the Fed will hike 2-3 times. The fear is clearly a bigger boost in inflation than that. In the past few days, the chance of 4 rate hikes has increased. There is now a 31.6% chance of at least 4 rate hikes. There’s even a 0.4% chance of 6 hikes. For the March meeting, there’s an 88.8% chance of a hike. Even though it’s virtually guaranteed, the changes in the odds show the market’s tone. The GDP growth rate expectations are very muted. Only 1 quarter is expected to reach 3% growth. It would be unusual to have Q1 be the peak in growth for the year especially considering the big snow storms in the quarter. These forecasts came out before the March storms, but it’s worth noting the March data points will be affected by the 2 Nor’easters.

Very Low Layoff Announcements

The total announced layoffs in January and February were 80,022 which is the lowest since 1995. The announced cuts have been below 50,000 for 22 months which is the longest streak since the consultant firm Challenger started measuring this. Furthermore, the cuts were 35,369 in February which was a 20% drop from the previous month. This supports the ADP report. This information points to the labor market being full just like the jobless claims. The counter point is seen in the chart below as the plans to raise wages haven’t been met with actual wage hikes. This is just like how the consumer confidence hasn’t been followed by actual spending growth acceleration.

Conclusion

For the first time since 2016, the market is range-bound. As of Thursday, stocks were right in the middle of the range. Without the tariff fears bringing stocks down, they should move higher. The next big focus will probably be the Fed meeting which is in 12 days. Just like the stock market, the 10 year bond has been range bound. The next time it approaches 3%, I don’t expect stocks to decline. I think that’s a non-consensus opinion as the media has obsessed about that level being the point where “all hell will break loose.” There is a point where rates might be a problem, but we’re not there yet.