Weekly Market Pulse: The End of The Beginning
By Joseph Y. Calhoun III|April 13th, 2025| Alhambra Portfolios
Foreign investors own about 20% of US stocks, 30% of US Treasuries, and 30% of corporate credit. Official accounts of other countries may stick with US Treasuries (bidding at Treasury auctions last week seemed fairly normal) but individual and institutional investors may feel differently. A Euro-denominated investor who bought a 10-year Treasury note at the beginning of this year would be about breakeven on the price and would have accrued a quarter’s worth of interest, but they’d be down about 10% on the change in the Euro/Dollar exchange rate. If that math continues for very long, the rise in rates and the drop in the dollar are likely to accelerate. The same is true of US stocks, especially the growth stock-heavy S&P 500 where a lot of that foreign equity money is sitting. Stocks may have come off the mat last week but they aren’t even back to the levels of “Liberation Day” eve. Just getting back to there would require a further 5.7% rally from Friday’s close. And the index is also still down 8.6% YTD and 12.6% since the February peak.
The chaos of the tariff rollout has created a level of uncertainty that makes investment in the US very difficult, maybe impossible, to justify. Policies change on a whim with seemingly little thought to the consequences. The exemptions granted last Friday seem good at first but consider that a part used in a smart phone – say a battery – will continue to face the full tariff but an imported phone that contains that battery will be exempt. How exactly will that incentivize investment in the US? The granting of exemptions also creates, at a minimum, the perception of favoritism if not outright corruption. The big tech companies who donated to President Trump’s inauguration fund or his campaign get an exemption for their products but what about the thousands of small and medium-sized businesses that don’t have access? What about the lower margin US-based manufacturer who relies on some critical input from China who will face the full force of Trump’s China tariffs? Do they get invited to the White House? Or will they be shuffled off to the Treasury Secretary? Or relegated to some lower level official who has no more chance of getting the White House’s attention than the petitioner?
The universal and “reciprocal” tariffs also make it harder, not easier, to sign trade deals. The universal 10% and “reciprocal” tariffs abrogated all of the free trade agreements the US had in place, demonstrating to the entire world that we do not abide by our agreements. Who wants to sign a trade deal with the country that just violated numerous trade deals? One of the reasons the rest of the world invests in the US is because we respect the rule of law, with agreements signed by previous administrations honored by the new one. Further, contrary to President Trump and Secretary Bessent’s poker analogies, the US doesn’t have a very good hand right now. As we just found out with the exemptions announcement, there are certain things we want – and need – in the US that we can’t produce ourselves and that is unlikely to change for a long time, if ever.
Alhambra Partners |
