Anyone? Bueller?

By Crest Capital Advisors on April 21, 2025

Dow: (2.66%) to 39,142.23
S&P 500: (1.50%) to 5,282.70
Nasdaq: (2.62%) to 16,286.45
Russell 2000: 1.10% to 1,880.62
Bitcoin: 85,055
10 Year Yield: 4.33%
Outperformers: Real Estate 3.87%, Energy 3.22%, Consumer Staples 1.98%, Utilities 1.88%
Underperformers: Tech (3.66%), Consumer Discretionary (3.23%), Communications Services (2.95%)

US equities were mostly lower this week, after ending last week sharply higher.  The S&P and Nasdaq indices are now down for the third week in the past four. Trade continued to serve as an overhang this week with some volatile headlines and escalating tensions with China. The White House also said China now faces a tariff of up to 245% on imports of certain goods to the US, higher than the 145% figure markets have been quoting and pricing in. China responded it will “fight to the end.” On the positive side, Trump posted about “big progress” in Wednesday’s trade talks with Japan.

Fed Chair Powell was a notable story this week, putting pressure on equity markets. Comments from Powell on Wednesday had some hawkish takeaways after he stated that the proposed and then suspended tariffs were “significantly larger than anticipated” and will likely pressure growth and push inflation higher. Also flagged tariff-driven inflation could have long-term persistent effects. He additionally called out the rapidly growing three pillars of the US annual deficit – Social Security, Medicare, and now the rapidly rising interest cost of the now $36 trillion of debt.  

This week, we’re channeling everyone’s favorite economics teacher from “Ferris Bueller’s Day Off” – you know, the one who could make even the most captivating economic policies sound like a lullaby. Picture Ben Stein’s monotone voice droning: “Anyone? Anyone? The Smoot-Hawley Tariff Act… anyone? Raised tariffs, anyone? Caused retaliatory tariffs… anyone? Led to trade wars… anyone?”

As global tariff talks dominate headlines and markets react with all the enthusiasm of Ferris’s classmates (which is to say, none whatsoever), this meme perfectly captures how something as seemingly dry as tariff policy can have dramatic real-world consequences – whether you’re sleeping through the lecture or not.

So next time someone starts explaining the nuances of international trade policy, feel free to respond with a deadpan “Anyone? Anyone?”

The “Strategic” Plan

Step 1: Implement Tariffs to Cut Tariffs

The Trump tariff strategy appears to follow a pattern of initially imposing high tariffs across multiple sectors and trading partners to create leverage, followed by selective reductions as part of negotiated agreements. This approach uses tariffs not as permanent economic policy but as temporary bargaining tools. By first creating economic pressure through elevated tariffs, Trump positions himself to later offer tariff reductions as concessions during trade negotiations, allowing him to claim victory when removing the very barriers he initially erected!

This tactic was evident in previous dealings with China, Mexico, and Canada, where initial broad tariffs were followed by agreements that reduced some of these same measures. The strategy relies on creating negotiating leverage through economic disruption, with the ultimate goal of securing trade terms favorable to specific American industries while generating political wins through announced tariff reductions.

Step 2: Raise Taxes to Cut Taxes

We estimate that Trump’s tariffs as unveiled would yield nearly $600 billion on a 12-month basis, marking the largest tax increase in modern US history. Of course, companies and consumers will adjust to the tariffs, and the government will collect less tariff revenue than the static estimate suggests. (abiding by the TRIED AND TRUE ECONOMIC RULE that the more you tax something, the more expensive you make it – the LESS YOU GET OF IT) But even the low-range estimates of around $2.2 trillion over 10 years still pays for half of the tax bill.

These are massive numbers that can help Republicans notionally pay for a new tax bill. The bill’s official score cannot incorporate revenue that has not been enshrined into law by Congress, but CBO has promised to give Trump’s tariffs a score. Leadership is aiming to convince Republicans to notionally count this revenue when considering the reconciliation bill.

So, yes, the new tax bill can certainly sterilize the negative tariff impacts, but once again, we’re getting a break over here and a new expense over there.

Step 3: Tank the Market to Rally the Market?

The recent tariff saga has created an economic whiplash that strains credulity. First, the administration announced sweeping tariffs that sent markets tumbling, creating uncertainty across multiple sectors and disrupting global supply chains. Investors responded with a predictable selloff, erasing trillions in market value amid fears of reduced corporate profits and economic slowdown.

Then, after orchestrating this market turbulence, the very same administration pivoted to broad tariff reductions, taking credit for the subsequent market rebound. This circular logic—creating a problem and then claiming victory for partially solving it—represents a particularly transparent form of political theater.

Contrarian Corner

The herd is once again stampeding in the same direction. Almost all of the major Wall Street banks have now meaningfully reduced their year-end price targets after having set them to expect yet another positive stock market year just a few short months ago. The great thing about Wall Street and its linear thinking is that it often gives us a glimpse into sentiment extremes. In times of stress like today, it also helps re-set expectations.

You Ask For a Miracle, We Give You the BofA Fund Manager Survey

Speaking of contrarian, we ask is the BofA Fund Manager Survey the ultimate contrarian indicator?

As evidence, take a look at the screenshot cover below taken on February 18th of this year…just one day ahead of the current all-time high. Here we see the Fund Managers were massively bullish with cash levels at the lowest since 2010!

And here we are this week, after the ‘tarrifying’ tariff announcements…the 5th most bearish positioning in the past 25 years! Time to buy?

But it gets better, we see in the chart below that a whopping 49% of respondents are now expecting a recession/hard landing.

And this is reflected in the future intentions indicator. Fund managers haven’t been this bearish on US assets in 30 years as they now intend to underweight US equities. (Good news for Int’l stocks?)

And it’s not just intentions either. The following shows investor allocation to US stocks has already dropped to 36% underweight, the most underweight since May 2023. Since February, the allocation to US equities has dropped 53%! This is a record 2-month decline.

Extreme Streak

Another record broken…The American Association of Individual Investors (AAII) Bearish Sentiment comes in above 50% this week for a record 8th straight week. Individual investors, as measured by this survey, have never been this bearish for this long. Read that last line again and let it sink in.

Reason for Optimism?

Over the last 40 years, every time the Volatility Index (aka The Fear Index) has moved from a closing level above 50 to a closing level below 30 (a condition we now find ourselves over this recent period), the result has been a median gain of 17% for the stock market over the ensuing 12 months. See the chart below for prior periods and details. We’d also point out the data is decidedly more mixed with just a 3-month time horizon. Bottoming is a process, not a single day event. Be patient and maintain perspective.

Economic Funnies

Crazy Stat(s) of the Week

• The outlook for new orders from NY Fed regional manufacturers literally hit the lowest level in the history of the survey. Paging Jerome Powell.

• Total assets in money market funds have hit a record $7.4 trillion, tripling over the last decade.

Quote of the Week

“Had it not been for the recent uncertainty from global tariffs and their downstream impacts, we would have raised our expectations for 2025.”    

   –     Tim Arndt, CFO, Prologis

Calendar of Events to Watch for the Week of April 21st

Earnings season will be in full swing next week so analysts and investors will be focused on what major US corporations have to say about future guidance and outlook as it pertains to the uncertainty around tariff impacts to growth. Coming into 2025, analysts had predicted robust profit growth for the year, but that was before all of the uncertainty was introduced. On the economic front, the main events will be Wednesday’s preliminary PMIs and Thursday’s Durable Goods reports.

Of course, tariffs and politics will continue to play a central role in influencing risk sentiment. Enough time has gone by from the suspension of tariffs that markets will begin looking for some actual deals to take shape. The longer this lingers, the more the uncertainty premium (and therefore elevated levels of volatility) will persist.

Monday 4/21 – US Leading Indicators are expected to continue the streak of negative readings, with economists expecting a decline of -0.5%.

Tuesday 4/22 – The Richmond Fed Index is expected to remain slightly in contraction territory at -2.0, down from -4.0 last month.

Wednesday 4/23 – The Markit PMI (preliminary) for Manufacturing and Services activity in April are expected to come in at 49.0 and 52.0, respectively. Both readings would be below March levels, which were 50.2 and 54.4. March New Home Sales are expected to post a slight increase of ~1.8%.  

Thursday 4/24 – March Durable Goods are expected to post a 1.5% monthly increase with the Ex-Transports sub-set at 0.35%. The weekly claims data will continue to get attention, but for months now, no material increases have been noted in this data series.   

Friday 4/25 – No major US economic reports due today. The Final University of Michigan Sentiment survey for April will be out with expectations for a decline to 47.0. As we’ve pointed out multiple times over the past few months, this report is taking on less and less significance as political leanings have called the output into question.

Source: MarketWatch / FactSet (April 2025)