SCM Q&A: These Are The Two Most Asked Questions This Week
What’s driving the latest market volatility?
We understand that market pullbacks are never pleasant but are a natural part of the investing cycle. The recent market swings have been influenced by several key themes: tariff uncertainty, stubborn inflation, slowing consumer spending, and rising recession fears. Here are some key points to consider:
Tariffs continue to create uncertainty about the future of inflation. In addition to the tariffs President Trump has already implemented, reciprocal tariffs are expected to be announced on April 2 with many of our trade partners.
Consumers who have become quite pessimistic have moderated their spending since the start of the year while increasing their savings rate, anticipating a potential economic slowdown.
Given tariff uncertainty, the Federal Reserve has taken a wait-and-see approach to interest rate policy. While the Fed still projects two rate cuts in 2025, the market has had to adjust to the higher-for-longer mentality.
Amid these concerns, stock market valuations remain stretched from historical averages. The S&P 500's forward P/E ratio at 20.5x is well above the historical average of 15.8x, which may be making markets more sensitive to negative news or policy shifts.
Tech stocks have been key drivers of market swings, given their weight in the S&P 500 index. The Magnificent 7 stocks are either in or near correction territory, a decline of at least 20%, due to uncertainties about economic growth, tariffs, and interest rates.
Remember that volatility, while uncomfortable in the short term, has historically been part of healthy market functioning. Rather than reacting to these temporary movements, the most prudent approach is to focus on your long-term financial goals and maintain a properly diversified portfolio aligned with your risk tolerance.
How will the April 2 tariff deadline impact the economy?
On April 2, the Trump administration is expected to announce reciprocal tariffs on countries that currently impose tariffs on American goods. Many economists, businesses, and consumers worry this will raise prices on many consumer goods. However, it's essential to maintain a perspective on how trade policies typically affect the broader economy and markets over time.
In the short term, new tariffs could potentially increase prices on certain imported goods, contributing to inflation. However, the actual impact depends on several factors, including which specific products are affected, whether companies absorb some costs rather than passing them entirely to consumers, and if consumers shift to domestic alternatives.
Uncertainty around trade policies continues to be reflected in consumer sentiment surveys. The latest University of Michigan survey highlights that consumers expect inflation to reach 4.1% over the next five years, a thirty-year high and well above the Fed’s 2.0% long-term target.
The concern is that higher inflation will slow consumer spending. The savings rate by consumers has increased in anticipation of higher prices. While spending has slowed since the start of the year, spending has historically been correlated to wage growth and employment, both of which remain healthy at this time.
Despite the market's response, the effects of tariffs on inflation will likely be gradual rather than immediate. There is an important distinction between one-time price increases on specific goods and persistent inflation. In 2018, for instance, washing machine prices shot higher due to tariffs, but then stabilized. This is different from pressures that raise many or all prices of goods and services across the entire economy, such as when an economy is overheating or when supply chains are disrupted.
Remember that markets have already incorporated expectations about trade policy into current pricing. Rather than making significant portfolio changes based on specific policy deadlines, maintaining a diversified approach aligned with your long-term financial goals remains the most prudent strategy during periods of policy uncertainty.
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