Markets will open this morning with the S&P 500 (IVV) barely 1% away from its all-time high set in February. Momentum investors took advantage of the peak fear following the sell-off triggered by the Liberation Day tariff announcements. So far, markets are not worried about punitive tariffs of 50% on steel and aluminum.
Markets view the temporary 145% tariffs against China cut down to 30% as bullish. Moreover, these additional costs are not reflected in inflation reports. Fearful economists underestimated that companies sold down their inventory first before they planned to raise prices. In addition, customers bought goods ahead of time to avoid tariffs.
Walmart (WMT) is one of the first firms to warn its shareholders. It planned to pass some of its tariff costs to customers, raising prices. That would hurt same-store sales as customer traffic falls.
Higher Government Spending
The “Beautiful Bill Act” will introduce higher spending, offset by a cut in Medicare coverage. Stock markets are trading higher as they price in this benefit. Even though the government’s debt will rise further, its impact on government bonds is minimal. The 20+ Year Treasury Bond ETF (TLT) lost 6.86% in the last year. However, it is up by 0.21% YTD. The 7-10 Year Treasury bond ETF (IEF) is up 3.08% YTD.
Debt holders will continue to buy short-term government debt to collect around 4.0% in yield, risk-free.
