January 6, 2025
“There is no normal life Wyatt, there’s just life. Now get on with it.”
I know I started last quarter’s letter with a quote as well, but after hearing of Val Kilmer’s passing this week, this line from one of his great roles as “Doc” Holiday in the movie Tombstone caught my eye. As you will read in our Market Commentary accompanying this letter, one of the themes for financial markets and the economy right now is uncertainty. I said in my recent video and in interviews, there is a bull market in uncertainty. That’s understandable given the headlines we see every day about policy, geopolitics, the economy, etc.
But as my long-time colleague and friend John Wiseman (JDW) likes to say when we talk about these dynamics in our Investment Committee meetings: “Find me a time when there wasn’t uncertainty.” Granted, there are degrees of uncertainty and today’s would be relatively elevated, but similar to the sentiment shared by “Doc” above, JDW might say “There is no certainty in this financial world, just uncertainty. So, get over it.” RIP Val. Now let’s get on with it.
Tariff-ied
I hope this letter finds you well and that you have survived the onslaught of pollen in the air this time of year. I started putting an outline of this letter together before the April 2nd tariff announcements from President Trump. As I sit here writing the morning of April 3rd, we have the details of that announcement. While the rates announced will result in an average tariff rate in excess of the Smoot-Hawley Act of 1930 (see chart from Evercore ISI) and stock futures point to a down 3+% day, there are still some important unanswered questions here. How will other countries respond to these new tariffs? How long will they be in place? And are they legal through executive action?
On that last point, President Trump is using the International Emergency Economic Powers Act (IEEPA) passed in 1977 as a means to pass these sweeping changes through executive order vs. legislation. There will be legal challenges in the coming days and weeks. While we will have to wait a little longer to get the answer to the other questions, there is evidence of some economic damage to the economy even before these new tariffs were announced.
Extreme policy uncertainty (see chart from Evercore ISI below left) is actually starting to have an impact on real world decisions by consumers and businesses. We have heard from the likes of FedEx and Nike (among others) recently about businesses and consumers being more cautious in their spending. We see this attitude in recent confidence survey data for both constituencies (see chart from Evercore ISI below right). The details of yesterday will certainly not improve these feelings. In his Market Commentary, Dr. Mark Pyles details some of the dynamics of the potential economic fallout from the uncertainty and tariffs. The growth rate for the quarter that just ended could be close to flat or even negative by some estimates based on a jump in the trade deficit from consumers and businesses buying ahead of the tariff announcement yesterday. No doubt the tariff rates put forward will add to the drag on economic output, but again the duration and response will play a role in just how much.
Similarly, the anticipation of these tariffs has negatively impacted equity markets (see Market Commentary) and weighed on investor sentiment. In fact, the net reading on the outlook for higher stock prices in the most recent consumer confidence survey was the lowest since 2010. All this to say, equity markets discounted some negative news already. The indications this morning would take the S&P 500 back toward the lows reached on March 13 and March 31. If these levels can hold as support, markets could bounce in the near term. If the market closed where it is indicated this morning, they would be down approximately 6.6% on the year and about 10.7% from the highs reached in mid-February. For context, the average correction in any given year for the stock market is about 13%.
Congressional Response
Beyond tariffs, Congress is working (yes, they do that on occasion) on a tax cut and debt ceiling raise bill to try and offset some of the shock of these announcements. In theory, the tariffs could raise $500 billion or more in revenue, providing the fiscal cover to lower tax rates. The market reactions to the tariffs should spur lawmakers to move quickly, albeit that word must be viewed relative to Washington D.C. terms. In addition, the Federal Reserve will be incorporating this new data into its outlook. On the one hand, tariffs will result in higher prices but also likely lower economic output. The Fed will have to balance these two dynamics given their mandate for stable prices and full employment. Our sense is that any material weakness that emerges in the labor market as a result of these actions will be met with rate cuts from the Fed. Although they would not admit it, the market reaction will also play a role in their next move. The next Fed announcement on rates is scheduled on May 8.
Market Response
Reviewing the market response this morning, it is clear investors are moving to price in two different dynamics. One is the specifics of the tariff announcement. For example, surprisingly, Vietnam was hit with a particularly high tariff rate of 46% and companies that source significant goods here like Nike, Lululemon, etc. are down low double digits in reaction. At the same time, the potential economic shock of the rates announced along with the preexisting damage to economic sentiment discussed above have investors starting to price a more severe growth slowdown or recession.
We can see this dynamic in the trading of banks, which are down close to 10% today along with movements in economically sensitive sectors like Industrials and Energy. Reflecting to the start of this letter and the discussion of uncertainty, we actually have more certainty today than we did this time yesterday. Financial markets are having to reprice to this new reality as it exists today. While painful, at the moment this remains an economic shock and not a financial shock. We will be watching credit spreads closely along with trading in other financial instruments and general financial conditions to determine if we are moving from one type of event to the other. Instructively, we will start hearing from individual companies next week as they report earnings and get a better understanding of the impact of this news on their current and future action plans.
One final thought on uncertainty is that it can also act as a contrarian indicator. The charts on the right from Strategas Research demonstrate that higher readings of policy uncertainty show higher forward returns. Needless to say, total policy uncertainty is very elevated at the moment. As always, in situations like these, we will strive to communicate updated thoughts and information as quickly and clearly as possible.
Firm News
In firm news, we continue to evolve our online presence. We launched an updated website over the past quarter, with renewed focus on our client journeys. Our Insights and Resources pages provide a central location for updated market and industry information. We encourage you to check it out and follow us on LinkedIn and/or Facebook or Instagram to get the latest updates. A shout out to our Marketing Manager Kalisse Evert for all her hard work on these areas.
Thank you as always for the confidence you have placed in us and your continued support of Greenwood Capital. We look forward to seeing and talking with you soon.
On behalf of all the employees at Greenwood Capital,
Sincerely,
Walter B. Todd, III
President/Chief Investment Officer
The information contained within has been obtained from sources believed to be reliable but cannot be guaranteed for accuracy. The opinions expressed are subject to change from time to time and do not constitute a recommendation to purchase or sell any security nor to engage in any particular investment strategy. Investment Advisory Services are offered through Greenwood Capital Associates, LLC, an SEC-registered investment advisor.
