Transcript
Amada Agati:
Tariffs on, tariffs off, tariffs blocked in the courts?! In the June edition of Adding Alpha, we take stock of the purple haze surrounding fiscal policy and share thoughts on what guideposts are most important for markets this summer… Hint: June’s song reference is Taxman by the Beatles.
April 9th sure feels like a lifetime ago for investors…. Since the market bottomed, US markets have mostly recovered back to February levels. To say the least, there’s been a ton of volatility only “to get right back to where we started from.” For those keeping score at home, that’s a 1975 Maxine Nightingale R&B hit single.
With the S&P 500 back to ~flat on the year, perhaps I should just leave it at that for this edition of Adding Alpha. Drop the mic and simply say, have a great summer?!
The reality is, we don’t believe we’re out of the woods yet with the purple haze of fiscal policy uncertainty, and the court ruling blocking the April 2nd tariffs is yet another in the laundry list of noise for markets. The strong signals from equity and fixed income markets over the last couple months have been key governors around how much purple haze markets are willing and able to stomach coming out of Washington (aka the Trump Put is real), but there are still a lot of open questions left unanswered.
That’s why we need some real wins to keep this market rally going, not just a de-escalation, particularly at these valuation levels. The court ruling by the US Court of International Trade will most likely end up in the Supreme Court. That doesn’t mean we should just throw the tariff playbook completely out the window, because the court ruling still gives presidential authority for tariffs in cases of countries with trade deficits.
That could still amount to ~15% tariff rates for 150 days across a broad range of trading partners including China, Mexico, Vietnam, and Japan. Tariff policy has been in a near constant state of flux since Day 1, so this just adds to the purple haze going forward.
Beyond trade, the focus continues to be on Congress and tax legislation. Tax cuts from the Tax Cuts and Jobs Act will be extended; it’s not a question of if, but more how, what, and by when.
The goal is to pass tax legislation by July 4th to avoid any further market overhang due to tax policy uncertainty, but it is a complex piece of legislation that needs bipartisan support, so it could take more time.
For reference, when the TCJA was passed back in 2017 it took just 50 days from being introduced in the House to being signed by the President. This time around is much harder because the Republican majority is much narrower than in 2017, and it’s happening at a time when the deficit is in excess of 120% of GDP, the debt ceiling was breached in January and we’re on the clock to get that resolved by early August.
Reconciliation rules require passage by September 30th as the worst-case scenario/outer bound on timing.
Headlines and fixed income markets have been worrying about the impact on the deficit over the next ten years being an additional $2.3 trillion, but that leaves out what tariff revenue could potentially provide as an offset. At current tariff levels, the math equated to about $2.1 trillion, meaning in its current form, the tax bill was almost entirely offset already. With the recent court ruling on tariffs, it certainly calls all of this math further into question, making the legislative approval process for taxes even more complex.
And with the 30-year Treasury yield hovering near 18-year highs, the bond market is signaling it's not giving much room for an even wider deficit.
All this to say, while earlier in the year, we felt like July 9th was a pretty pivotal date for markets – potentially an inflection point with a binary outcome on trade policy – the actual date is becoming a bit less relevant given all of these other moving parts and a market that has clawed its way back from the brink.
Suffice it to say, it’s “Definitely Maybe” going to be a busy summer for investors with not much of an Oasis yet from the purple haze of fiscal policy uncertainty.
