I think that the markets think there's no way major tariffs are going stay in place for long. And I think they might want to think again about that.
This morning's wild trading action is a case in point. A majorly over-exaggerated headline from Kevin Hassett hit the newswires (which aren't usually prone to such errors, but these are unusual times), and stocks surged from big losses into sharply positive territory--for all of about ten minutes' time.
The headline was purportedly that the White House was considering a 90-day pause on tariffs. Hassett had said no such thing. As that became clear (thanks to our Eamon Javers and others), stocks sold off again. But not all the way. The Dow is only down about 300 points as of this writing. It's as if the market can't shake the belief that the president is going to back down from his latest tariff round--or be forced.
Certainly, Trump's imposition of massive tariffs on dozens of our trading partners, effective this Wednesday, has caused major fissures to appear--even among his supporters. Advisors Elon Musk and Peter Navarro have been trading insults back and forth. Stanley Druckenmiller put out a rare post on X over the weekend to clarify that he does not support tariffs exceeding 10%. Bill Ackman called for a 90-day "time out," warning of "economic nuclear war" otherwise.
But if you listen to the president, and to the Treasury Secretary, you get a very different story. To put it very simply, they are sticking to their guns. Secretary Bessent explained in detail the new economic architecture they are seeking to put into place, completely unfazed as Dow was dropping 1000+ points the day after the latest tariff round was announced.
"The president is reordering trade," he told Tucker Carlson. "We are shedding excess labor in the federal government and bringing down federal borrowings. And then on the other side that will give us the labor that we need for the new manufacturing" here in the U.S., he said.
Just look at the non-reaction to Israel and Vietnam's efforts to bring their tariffs down in order to avoid new tariffs last week. I don't think this White House is looking for opportunities to back down. I think they view this as a one-time shot to remake the entire U.S. economic order, with high tariffs being a necessary catalyst for that.
"I believe that this is going to work," Bessent said. "What I do know is that the old system wasn't working. And if you look at a system that's not working, you've got to be brave to change it." Does that sound like language from an administration looking for an exit route? Especially from Bessent, who has the most Wall Street experience of the bunch.
Now, that's not to say that markets can't recover even if tariffs stick. The declines last Thursday and Friday were one of the largest we've ever seen. The S&P is down 13% year-to-date. So a decent hit has already been priced in.
"Back-to-back declines of this magnitude are rare...[But] selling because everyone else is selling has not historically been an effective strategy," Bill Miller told me over the weekend. Of the four prior times since 1987 when stocks dropped 4% or more in back-to-back sessions, the market was positive, six, nine, and twelve months later each time, Morgan Stanley's data shows.
"This looks to me like a garden-variety correction, albeit an unusual one," Miller said.
And nobody knows what's going to happen to the economy now, especially if the tariffs do stick. No one knows if the GOP will retain enough political momentum to pass the budget bill by year-end. No one knows if Congress or the courts will force the president to pivot on tariffs. All we do know is that the market has already borne what could be the brunt of this massive shock.
See you tomorrow hopefully--trying to shake this cold!
Kelly
P.S.--Trump just announced a further ratcheting up of tariffs on China in retaliation for their tariff escalation, and the Dow is down 900 points again. This is what I'm talking about!
