The opinions expressed below are my own and do not necessarily represent those of Visdom Investment Group, LLC.
90 Days.
For 90 days, the US is dropping tariff rates on China to 30% and China is dropping tariff rates on the US to 10%. That leaves a window of *some* trade within which, it is hoped, both countries can come to a long-term trade agreement. Investors viewed this as an unwinding of Liberation Day tariffs and equity futures zoomed higher overnight. The S&P 500 opened up around +2.5% and rallied even higher in the afternoon. Capital flow was higher today at 119% but I’m surprised it wasn’t higher. Yields climbed significantly across the curve too and the market only expects 57 bips of Fed rate cuts this year now. In April, during the most negative days, markets expected 100-plus bips of cuts.
So the tariff talk finally morphed into a compelling and positive catalyst for the markets, and the economy. US recession probabilities for 2025 dropped to 39% on Polymarket today. That’s a huge drop and every dip-buyer in the last month is vindicated yet again, if the US economy dodges a recession. The risk remains high but the tariff talk just became a bump in the road for the economy instead of a trench.
Can the economy handle it without triggering a negative cascade? Probably, but the tariff situations need to be resolved quickly. If these 90-day tariffs get extended instead of negotiated away, that’s going to leave a mark on the economy. How bad a mark remains to be seen.
But for the moment, everything is coming up roses for the stock market. It looks like market psychology has materially shifted into bull market thinking. Investors are looking towards prior all-time highs (6147 on S&P) and assuming that we are heading back to those levels in short order. *Unless* we see horrible economic data here’s the narrative that is spurring a new impulse of bullishness in the market.
There will be no recession, the trade landscape will not be a drag, the US earnings outlook is about to benefit from lots of upward revisions, and we are going back to peak valuation multiples.
Whether one agrees with this or not isn’t significant. This is the narrative. This is the attitude. This is going to be the elevator pitch for every long for the next month. It won’t just fade away on it’s own and it won’t stop after reaching overbought technical conditions. We’re going to have to smash through overbought technical conditions and live there for a while.
See you tomorrow.
-Mike
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