Trade War Redux: What’s Happening?
Markets tried to recover last week, on the last trading day of the month, after upbeat AI headlines and stronger-than-expected China manufacturing data. Still, they rolled over hard on Monday and Tuesday as tariff headlines hit.
On Tuesday, there was continued selling, but for a brief moment, the S&P 500 rallied and turned positive before falling back hard in the last trading hour.
The trigger? Trump reaffirmed 25% tariffs on Mexico and Canada and raised Chinese tariffs from 10% to 20%. Investors took the “sell first, ask questions later” approach, with the S&P 500 testing 2025 lows before a late-session bounce and then turning back lower.
The Trump Playbook: What’s the Endgame?
Treasury Secretary Scott Bessent laid out the administration’s strategy:
✅ Curb inflation by cutting consumer demand (less spending on social programs).
✅ Boost supply through corporate tax cuts and deregulation (more business expansion).
✅ Lower consumer sentiment (bonus to get the Fed to take action quicker).
This is a high-risk, high-reward strategy. The problem is that demand cuts happen immediately, but supply-side benefits take time to kick in. This creates a short-term hit for consumer-driven sectors before any recovery takes hold.
Remember, last week, I showed how initial jobless claims have steadily risen since January. And while Apple announced plans for a new factory in Texas, they estimated that it would take four years to build and run at full capacity.
The administration may not care for now, but investors and the rest of Wall Street are forced to pivot suddenly, and that is what is causing volatility and market drops. One week, tariffs are said to be a bargaining tool, and the next week, they are actually implemented. Maybe a week from now, tariffs will once again go away and be reported as nothing more than a bargaining chip.
Winners & Losers Under the New Policy
Some sectors will thrive, while others could get crushed. Here’s how it stacks up:
💰 Winners (Sectors That Could Benefit)
✅ Big Banks – Lower taxes + deregulation = bigger profits.
✅ Industrials & Manufacturing – Less regulation = lower costs, more expansion. The sector has been moving sideways, but it could be ready to break out to the upside.
✅ Energy & Mining – Deregulation fuels growth (but watch oil price trends).
✅ Defense & Aerospace – Military budgets usually stay intact.
✅ Big Tech – Tax cuts fuel record buybacks and earnings boosts.
✅ Small-Caps – Tax relief benefits smaller businesses (but high rates could still hurt). In the meantime, they are getting crushed by the threat of tariffs.
🚨 Losers (Sectors at Risk)
❌ Consumer Discretionary – Lower-income consumers tighten belts.
❌ Consumer Staples – Defensive, but shoppers could trade down to cheaper brands.
❌ Healthcare Providers – Medicaid cuts = shrinking revenues. Fewer workers with insurance means pushing off medical care.
❌ Real Estate & Housing – Tighter wallets + higher mortgage rates = slower sales.
❌ Utilities & REITs – Higher interest rates make dividends less attractive.
The Fed’s Role: The Wild Card for Markets
One major question mark remains: What does the Fed do?
If consumer sentiment and employment drop too fast, Powell could pivot from tightening to easing and drop interest rates to encourage growth. This would be a game-changer, as historically, Fed pivots have ignited massive stock rallies.
However, if inflation remains high, the Fed may hold rates higher for longer, crushing growth stocks and keeping consumer spending weak.
What’s Next? A Timeline for Markets
📉 Short-Term (3–6 Months): Expect more volatility as consumer-driven sectors struggle. Defensive stocks and cash-rich tech might hold up better. The S&P 500 is resting at a potential support area, but we have yet to see a piece of good news or a bullish candlestick pattern that says we are through with the selling. Typically, the market will have a reprieve from selling after 3-5 days, and we had that on Friday before continuing to sell off the next two days.
The Nasdaq-100 (QQQ) is approaching a 10% drop in the short term, which has often signaled market pivots.
📈 Long-term (12+ Months): If the Fed cuts rates, it could fuel a market rebound. Sectors that were hit hardest today could lead the next rally. We’re still in the middle of a bull market, and 5-10% pullbacks happen within bull markets. The only thing that gives me slight pause is that our trough-to-peaks are happening more frequently, the rallies aren’t pushing well beyond new highs, and the pullbacks are pulling back to the same area, showing a lot of consolidation and indecision.
What Should Investors Do?
✔️ Stay Defensive Short-Term – Focus on sectors that can weather consumer pullbacks.
✔️ Position for a Recovery – Watch for policy pivots that could fuel a rally.
✔️ Follow Smart Money Moves – Hedge funds and billionaires are already repositioning.
The next few months could get ugly, but history suggests there is an opportunity ahead. Will Trade War 2.0 bring more pain—or set up the next big buying opportunity?
Stay tuned.
