Investors have two bearish warnings to look out for. The U.S. dollar (UUP) weakness and the bond market yield increase will limit the White House in dictating its tariff policy.
After the U.S. elections, the U.S. dollar rallied while bond yields fell sharply. Markets thought that open trade and a thriving U.S. economy would continue. Instead, tariffs announced on “Liberation Day” changed the U.S. policy on world trade. The country wanted to sharply narrow the trade deficit gap through high tariffs.
Investors dumped the long-term bonds. The 7-10 year t-bill (IEF) and 20+ year (TLT) treasuries fell. Markets speculated that Japan, China, and other trade partners dumped treasuries to lift the yield. In response to the weak bond markets, the government announced a 90-day pause on the latest set of tariffs.
Markets are complacent to the 10% baseline tariff. Consumer defensive firms like Coca-Cola (KO) recovered toward its 52-week high. PepsiCo (PEP) is forming a “bottom.” Proctor & Gamble (PG) bounced back to a ~ $170 closing price.
Investors are betting that the U.S. will not succeed in pushing so high a tariff against its trade partners. Doing so would weaken its currency and import inflation. This prevents the Federal Reserve from cutting its rates since inflation is still a risk. As a result, unchanged rates limit the stock market’s recovery.
