AI generated
By Guest Blogger Doug Rowat
.
What makes Trump tick?
Needless to say, answering this question has been every analyst’s nightmare struggle this year.
Michael Kantrowitz, chief investment strategist at Piper Sandler, even went so far as to speculate, somewhat jokingly, that Trump will back down on tariffs whenever his approval rating falls below the Cboe Volatility Index. He may be on to something as Trump’s recent 90-day tariff pause coincided with the two metrics crossing paths:
Trump blinks when market volatility (blue line) moves higher than his approval rating (orange line)?
Source: MarketWatch
But such are the creative lengths that analysts are going to to predict Trump’s behaviour. I’m one of those struggling analysts, and while I would never claim to have solved the mystery of Donald Trump, I suspect that further tariff-policy retreats will coincide with the onset of intensifying negative market and economic data.
We saw as much when the troubling rise in US Treasury yields also became a clear contributor to that 90-day tariff pause. We’ve also now seen FOUR postponements on some or all of his proposed tariffs, postponements that have coincided, more or less, with either higher volatility, or meaningful downgrades of economic and earnings forecasts. Thus, we may be entering into a world where accumulating negative data will continue to curb Trump’s tariff impulses. A world, in other words, where bad data will, paradoxically, become good news for investors.
We’ve seen the bad-is-good phenomenon before. During the inflation crisis, for example, traditional market drivers were temporarily turned upside down. I argued as much in a March 2023 blog post:
…2023 is shaping up to be a year disruptive to traditional data relationships. Good market data is being perceived negatively (inflation inducing), while bad market data is being perceived positively (the economy’s cooling). Simply put, bad market data signals that central banks are winning the battle against inflation.
As it turned out, overall S&P 500 earnings growth was negative y-o-y in 2023, yet counterintuitively, the S&P 500 advanced an impressive 26% on a total-return basis. Though still far from turning negative, forecasted earnings growth this year is moderating rapidly. The upcoming Q2 earnings growth rate, for example, has been ratcheting lower on an almost weekly basis (see chart below). It’s also very likely that we’ll soon see the onset of negative US economic data as well, particularly in the labour market as corporations will almost certainly favour their profit margins over workers.
Forecast S&P 500 Q2 earnings growth rates steadily declining
Source: Zacks Investment Research. Consensus estimates.
Will consistently weaker earnings and economic data cause Trump to further back off on tariffs and thus send equity markets higher? That’s the theory. And it’s an intriguing one as relatively little economic and corporate-profit weakness has actually appeared in the current data so far, yet Trump has still paused tariffs, as mentioned, four times. It seems probable then that when the data actually does turn negative (an inevitability at this point) Trump will back off even more. Time (and the data) will tell. For now, the world holds its breath.
$ $ $
Finally, emails have flooded our inboxes throughout the year promising to ‘tariff proof’ client portfolios. Here are two that landed just this week:
‘Tariff proofing’ is the Bay Street strategy du jour
Source: Turner Investments
However, such strategies should always be viewed cautiously. Sales pitches like these are opportunistic and designed to capitalize on current market fears. We saw a similar flood of emails during Covid—emails offering sure-fire strategies for capitalizing on the so-called new global-pandemic economy. Needless to say, Zoom, Docusign and Peloton featured prominently. But look how quickly these pandemic darlings lost their lustre:
Zoom Communications
Docusign
Peloton Interactive
Source: Google Finance. Five-year price charts.
This time around it’s the so-called new global-tariff economy. However, this investment theme could fade just as quickly as Covid. Therefore, be skeptical of anyone promising to ‘tariff proof’ your portfolio.
The ‘proofing’ may only last until Trump’s next post on Truth Social.
Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Investment Advisor, Private Client Group, Raymond James Ltd.