People Are Kinder Than You Think
Markets look to finish the week mixed, with the Nasdaq and S&P slightly lower and the Dow Jones Industrial Average slightly higher. After four weeks of markets finishing lower, things appear to have temporarily stabilized. The common denominator is that we didn’t hear about tariffs for the first time in four weeks. Before you breathe a big sigh of relief, be warned that April 2nd is the next catalyst as President Trump has declared this to be “liberation day.” By that, he means, the next round of reciprocal tariffs will be announced against those countries that put tariffs on U.S. goods over the past month. Enjoy the respite as the next policy moves are awaited.
Details of the reciprocal tariffs are still being worked out, but the Trump administration is planning to unveil its new trading policy centered around tariffs on imported goods based on assessments of each trading partner's policies. Trade worries are a known unknown at this point and may keep volatility elevated in the weeks and months ahead. Expect sentiment to remain fragile ahead of the April 2nd announcement.
Perhaps the best news this week was the Federal Open Market Committee’s (FOMC) announcement that two interest rate cuts are on the table for later this year. Despite holding interest rates steady for now, this message was a clear indication that the Fed believes a slowing economy will outpace increasing inflation in the months ahead. While that’s not great news for the economy, it is good news for the stock market. In addition, the Fed revealed it is slowing the pace of its balance sheet reduction, known as quantitative tightening (QT). The positive reaction from markets likely reflected some relief that the Fed believes the inflationary impact of tariffs will be transitory as opposed to an ongoing source of inflation. And yes, Chairman Powell did specifically use the word “transitory” which is striking considering how wrong he got it the last time he uttered that word.
In line with its announcement, the Federal Reserve now believes U.S. GDP will slow this year to 1.7% from the prior 2.1%. Additionally, it now sees unemployment growing from 4.1% to 4.4% by year end. And lastly, it now believes PCE inflation, which has remained stubbornly above its 2% target, to grow from 2.5% to 2.8%. The silver lining is that it believes this growth in inflation to be a one-time event. Think of it this way… prices will increase this year by some portion of the tariffs but not increase again next year since the tariffs are already priced in. Year-over-year, prices will grow by inflation (i.e. 2% or a little more) but not have the added price of tariffs on top, since they’re already baked in at that point. However, this is little solace for consumers this year and more generally higher price levels going forward.
In closing, I turn to the 13th annual World Happiness Report and what it has to say about our current state of affairs. For the eight consecutive year, Finland tops the rankings. In fact, when it comes to happiness, the Nordic countries appear to be doing something right. The more surprising findings include happiness linked to sharing meals with others, having somebody to count on for social support, and household size of four to five people as predictors for increased happiness. Additionally, how we view others also informs us of our level of happiness. When we believe others are kinder, it alters the way we perceive our neighbors. We’re more inclined to think about a stranger as a friend we haven’t met yet instead of a potential threat. Unfortunately, the United States has fallen in the rankings to 24th on the list, from 11th in 2012. A big part of our decline in the rankings is at least partly attributable to Americans younger than age 30 feeling worse about their lives. So, if you have access to a young adult, give them a hug, share a meal with them, and let them know you are there for them. Maybe we can finish higher next year. Now you know.
Bruce J. Mason, MBA