Destroy the Village to Save the Village?

By Crest Capital Advisors on April 7, 2025

Dow: (7.86%) to 38,314.86
S&P 500: (9.08%) to 5,074.08
Nasdaq: (10.02%) to 15,587.79
Russell 2000: (9.70%) to 1,827.03
Bitcoin: 84,220
10 Year Yield: 3.99%
Outperformers: None
Underperformers: Energy (14.10%), Technology (11.41%), Financials (10.28%), Industrials (9.41%)

Is this really the strategy?

US Stocks were rocked this week, posting their worst performance since Covid in March 2020. President Trump’s tariff policy has generated significant market instability that now threatens economic growth and investor confidence. The recently announced tariffs on a wide range of imports have triggered sharp equity market selloffs, soon to be disrupted supply chains, and created substantial uncertainty for businesses attempting to plan for the future.  The market reaction to the tariff announcement fit with thoughts that the Trump put (that the administration will alter its course under market or economic duress) is further out of the money than originally thought, though it still exists. Trump also said Thursday that he’s open to dialing back tariffs if other countries make a “phenomenal” offer.

These tariffs function essentially as taxes paid by American consumers and businesses, driving up input costs and reducing purchasing power. Industries reliant on global supply chains face particular challenges as they scramble to reorganize operations or absorb higher costs. The long term benefit of re-shoring of domestic manufacturing won’t be felt likely for years.

The policy’s stated goal of protecting American manufacturing has been undermined by its implementation, which lacks strategic coherence or clear economic justification. Many economists warn that these tariffs will likely result in retaliatory measures from trading partners (China already announced a 34% retaliatory tariff), potentially sparking a broader trade war that could severely damage global economic growth.

The administration should have known that a sudden shock to tariff rates of the size proposed would disrupt markets and confidence. They should have taken a gradual and predictable approach, perhaps providing “forward guidance” similar to how Central Banks signal interest rate changes. This would give markets time to adjust and reduce the risk of abrupt sell-offs or inflationary spikes.

As a consequence, a number of strategists cut their S&P 500 year-end price targets this week citing downward earnings revisions, weaker economic growth, greater uncertainty, and a higher recession risk. A number of sell-side economists also adjusted US economic growth and inflation forecasts this week. JPMorgan said Trump’s tariffs could raise PCE prices by 1-1.5% this year and push Q2 and Q3 real disposable personal income growth into contraction, which alone could push the economy close to recession.

Rather than protecting American interests, the administration’s approach to trade policy risks isolating the United States economically while failing to address the complex realities of modern global commerce. A more effective approach would involve targeted trade negotiations, developing workforce skills, and investing in infrastructure and innovation to enhance American competitiveness. These missing elements will need to be unveiled soon or markets may continue to have problems.

In short, and we’re disappointed to have to write this, but “Liberation Day” looked a lot more like “Liquidation Day”. What remains to be seen is whether our primary trading partners (Canada, Europe, Mexico – NOT necessarily China) will negotiate a deal with President Trump that allows him to declare a win, make a positive economic impact, and subsequently reverse the tariff regime before irreversible economic damage is done and we find “Liberation Day” liberating our population from employment and inducing a true Washington created economic contraction.

Advice from “Uncle” Warren

Times like these call for perspective. And for that, we often find ourselves turning to one of the greatest investors of all time, Warren Buffett.

In his 2017 letter to shareholders, Buffett wrote the following:

“There is simply no telling how far stocks can fall in a short period.” But should a major decline occur, he continued, “heed these lines” from Rudyard Kipling’s classic poem “If”, circa 1895.

“If you can keep your head when all about you are losing theirs…If you can wait and not be tired by waiting…If you can think….and not make thoughts your aim…If you can trust yourself when all men doubt you…Yours is the Earth and everything that’s in it.”

Buffett further went on to write that he views downturns as “extraordinary opportunities”. Why? Because, historically it’s never been all that long before the market resumes its upward trajectory.

You Have to be in the Market to Get the Market Gains

This chart is a classic within the investment community but it’s definitely time for a review. From 1995 – 2024, if you were fully invested in the S&P 500 your capital grew to $224,278 for a 22.4x return! But if you missed JUST THE 10 BEST DAYS, your return was negatively impacted by more than half at $102,750.  If you missed the 20 best days, your return was even less at just $60,306.

Can We Talk Ourselves Into a Recession?

The answer is maybe, yes, possibly. But whether we do or not comes down to how long we remain mired in an “uncertain” world. If uncertainty stays elevated for an extended period, it will have a more negative impact on the economy, see chart below from Apollo, which shows the impulse responses of a temporary and a permanent shock to economic policy uncertainty in a vector autoregression model with GDP and economic policy uncertainty.

What the model found is a one standard deviation shock to economic policy uncertainty leads to a -0.2% point decline in Real GDP. Temporary shock is defined as a four standard deviation shock in Q1, and permanent shock is defined as a four standard deviation shock in Q1, three standard deviation shock in Q2, two standard deviation shock in Q3, and one standard deviation shock in Q4. Sources: Bloomberg, Apollo Chief Economist

Translation: The economy can weather a short-term shock or period of uncertainty if it does not persist beyond a quarter or two. IF it extends beyond that, the degree of impact is measurably more significant. We still have time for the current set of circumstances to improve enough to stave off recession. We have evidence of this economic resiliency with the 2022-2024 market environment where we endured 5% rate hikes and the economy managed to grow through it anyway.

Cap-Weighted Carnage

As shown below, the 10 largest stocks in the S&P 500 really did a number on the major indices in the first quarter.  These ten stocks averaged a drop of 11.4% in Q1 versus an average drop of just 0.6% for the other ~490 stocks in the index.  The five largest mega-caps all fell 10%+ as well. Unfortunately, Q2 is off to an equally bad start, though it’s only been one week and a lot can change.

Economic Funnies

Crazy Stat(s) of the Week

• On Thursday, Hedge funds sold global equities in the largest 1-day amount since 2010, according to Goldman Sachs. Meanwhile, retail investors bought $4.7 billion in stocks the same day, the largest level over the past decade, per JP Morgan.

• The average stock in the Russell 1000 Index is now down -30%+ from its peak. The average technology stock is down in excess of -40%!

Quote of the Week

“For most investors: 99% of good investing is doing nothing, the other 1% is how you behave when the world is going crazy.”      

        –           Morgan Housel

Calendar of Events to Watch for the Week of April 7th

Thankfully, Q1 Earnings Season kicks off in earnest on Friday with major money center banks on deck to report before the major ramp in earnings the following week. Investors will be looking for indications as to whether all the tariff uncertainty is going to lead to earnings outlook cuts on a go forward basis. Elsewhere on the corporate front, WalMart’s Investor Day Event on Wednesday will be a highlight, particularly in light of the tariff situation with investors looking for clarity as to what this means for retail sales and consumer spending going forward. 

On the US Economic Calendar, the main events will center around inflation with the release of the Consumer (CPI) and Producer (PPI) price indices on Thursday and Friday respectively. The Fed remains on “hold” for the time being. More benign inflation readings could help bolster the case for a rate cut sooner than later. But to be realistic, the tariff uncertainty has thrown a wrench into these plans.

Monday 4/7 – US Consumer Credit for February is expected to come in at $15.3 billion, well below the prior month’s $18.1 billion.    

Tuesday 4/8 – The NFIB Small Business Index for March is expected to come in below the prior month’s 100.7 level on the back of tariff uncertainty.

Wednesday 4/9 – The Meeting Minutes from the recent FOMC meeting will be released though given the current state of affairs, it’s likely to get less attention considering how rapidly conditions have changed since then.

Thursday 4/10 – The March Consumer Price Index (CPI) is expected to show a 0.2% month-over-month increase and 2.6% year-over-year The Core (Ex-Food/Energy) is expected to show a 0.3% monthly increase and a 3.0% annual pace.

Friday 4/11 – The March Producer Price Index (PPI) is expected to show a 0.1% monthly increase and a 3.1% headline pace for the trailing 12 months. The Core (Ex-Food/Energy) is expected to post a 0.3% increase for the month and tick up to 3.5% year-over-year, above last month’s 3.4% pace. Source: MarketWatch / FactSet (April 2025)