Let's Get Ready to Rumble

Markets struggled this week as threats of tariffs and global unrest caused further uncertainty. As of this writing, it appears that the proposed tariffs on Canada and Mexico, that had been delayed a month, are now going to take effect early next week. While the long-term effects remain unknown, the short-term effects could include a trade war and an uptick in inflation. The result is that investors have become fearful due to both headline news and the daily increase in instability and uncertainty regarding economic and global issues. We remain steadfast in our belief that in the long-run daily life will return to normal. However, how long this current phase lasts is anyone’s guess.

In recent weeks pessimism has permeated the markets. Last week we learned that consumer sentiment had fallen significantly. This week a different, albeit equally important metric, showed that consumer confidence had declined 7% in February. Concern about labor-market conditions, future income, and employment prospects were key factors according to the Conference Board’s Consumer Confidence Index. This is understandable given the government layoffs, both actual and threatened, as well as the private sector layoffs which are beginning to gain traction. The jobless claims rose to 242K in the past week, which in and of itself is not a concern, but the direction could be if it continues. Additionally, we rely heavily on economic data which in large part comes from a multitude of government agencies. As layoffs eat into these agencies, they may interfere with the collection and release of the reports we rely on.

As for tariffs, earlier this month, President Trump issued a temporary pause just hours before the blanket tariffs on Mexico and Canada were set to go into effect. His main concern was border security. In negotiations, Canada agreed to create a fentanyl czar, while Mexico sent 10,000 troops to the U.S.-Mexico boarder to stop undocumented migrants and drugs. However, the compromise apparently wasn’t enough to stop a burgeoning trade war. The following dates are worth noting:

March 4: 25% on imports from Mexico and Canada. Canadian energy products like oil and electricity will only face 10% tariffs. China will have another 10% tariff, on top of the 10% initially imposed on February 4th.
March 12: 25% tariff on all steel and aluminum imports. The U.S. imports about 80% of its aluminum and 17% of its steel, most of it from Canada.
April 2: An announcement on President Trump’s reciprocal tariff plan is expected. When first introduced, it was a countermeasure against the European Union and its Value Added Tax (VAT).

In inflation news, January’s data was in line with expectations. Personal Consumption Expenditures (PCE) rose by 0.3% in January and 2.5% on an annualized basis. Core PCE, which excludes food and energy, rose 0.3% in January and 2.6% annualized. As I mentioned a week or two ago, there are signs that the economy is beginning to slow. If instead, we choose to look at the current scenario as the glass being half full, we may say that the economy is normalizing from a period of above-trend economic growth as opposed to heading toward a recession. Furthermore, the silver lining to the economic momentum slowing is that it has revived expectations for the Federal Reserve to cut interest rates. Futures markets are now pricing in two quarter-point rate cuts in 2025, which could serve as a counterbalance to a slowdown in economic growth.

And lastly, onshoring may be picking up steam. Apple announced it plans to invest $500 billion in the United States over the next four years. For decades, we’ve watched U.S. companies, invest hundreds of billions of dollars outside of the United States. As U.S. workers in various industries find their jobs being outsourced and whole industries being shuttered, the answer was always “retraining” which rarely occurred. Apple announced among its many initiatives it will put $10 billion toward the production of U.S. made semiconductors made in Arizona. It plans to expand its domestic data center capacity and begin assembling servers for its AI product, called Apple Intelligence, in Houston. Finally, it will open an Apple academy in Detroit to help businesses implement AI and train manufacturing workers. To support these efforts, the company plans to hire 20,000 U.S. based employees for roles related to research, semiconductor engineering, and AI development. Now you know.

Bruce J. Mason, MBA