Politics As Theater

Stocks rebounded this morning, following yesterday’s big intraday reversal (see below). At the moment, the Dow is up 75 points, the S&P 500 is up .5% and the Nasdaq is up .9%. The bond market is also trading broadly higher today with the exception of long-term Treasuries. Corporate bonds are leading the charge, up between .1% and .2%.

Last weekend President Trump announced immediate 25% trade tariffs on Mexico and Canada (10% on Canada’s oil) as well as an additional 10% on Chinese imported goods. The move had certainly been telegraphed in advance, yet still caused a moment of geopolitical panic due to the risk of an abrupt trade war with our allies. It also hit the stock market hard, with the Dow quickly falling more than 600 points and the S&P 500 down nearly 2% yesterday morning. The bond market responded in kind, rising in price as traders sought a safe haven.

And then, just as suddenly, the clouds blew away and the sun came out. The Dow ended yesterday’s session only slightly lower and the S&P pared its loss to -.7%. The bond market’s rally evaporated. What gives? In a rushed and chaotic series of negotiations over Sunday and Monday, Mexico’s president and Canada’s prime minister both agreed to tighter policing of their borders in exchange for a delay in Mr. Trump’s tariff imposition. Their stay of execution will apparently last 30 days, giving time for further negotiation. In addition, the White House says Mr. Trump & Chinese President Xi will meet later today to start direct trade talks.

Don’t expect the weather to clear permanently. This kind of policy-induced market volatility is probably here to stay. It certainly follows the pattern of the first Trump Administration. This latest event serves as a reminder that politics is unpredictable, prone to theater, and therefore shouldn’t be traded. It cannot guide our thinking about how to invest. Ritholtz Wealth CEO Josh Brown characterizes the tariff fight as a “reality show” and urges long-term investors to “tune it out.” We agree. Our focus at the moment is corporate earnings, and we see evidence that profit margins are strong and rising. The economy remains very healthy, driven by a strong job market and consumer spending. Most of what we call the “fundamentals” are leaning positive, but we’ll have to weather a few political storms.