The ‘Misery Zone’
By Michael Coolbaugh, Chief Investment Officer
*The following is a portion of our ‘Weekly Observations’ report that was published to clients on April 22, 2025.
If there’s one thing I’ve learned throughout my investing career, it’s that markets never travel in a straight line. That’s part of the reason why I’m becoming a little concerned about the overwhelming anti-US narrative. We’ve seen it just about everywhere. Market behavior – foreign equities have absolutely trounced US equities YTD. The US Dollar has been pummeled >10% from its pre-inauguration high. US Treasury bonds have been dumped at an equally-furious pace. And gold continues to soar above the rest.
This morning, one of the headline stories on Bloomberg reads, Markets Are Discovering the Real Trump Trade Is ‘Sell America’. Now, I don’t mean to be too harsh on the mainstream media, but it’s highly unusual for a market view to be “non-consensus” when it’s printing on the front page of all major media outlets. None of these outlets were calling for such a trade back in January. They only tell you about it after the fact when US equities have been trounced by >30% over the last four months.
Let me be clear – I still don’t love US equities with the S&P 500 Index trading just shy of 20x forward EPS. Is there maybe some upside if Q1 earnings season comes in better than feared? Probably. But all of that was baked into the cake before the trade war really took off. And, in a perverse sense, those Q1 results were probably bolstered by that very same trade war. What I mean is, measures of US retail sales continue to show positive signs for the overall economy. But how much is that front-running of tariff fears?
One of the narratives that I think has taken hold is this idea that US consumers don’t really pay attention to the tariff headlines. It’s almost as if investors believe US consumers are unsophisticated, ignorant, whatever you want to call it. But talk to your local car salesman. See what they have to say about their customers and why they’re coming into the dealership. Listen to what some of the small- and medium-sized businesses are saying on their earnings calls. The US public is extremely aware of the trade war and what it might mean for the cost of goods in the future.
So, yes, I do believe that Q1 results will probably come in stronger than the current dire sentiment. And perhaps that provides a bit of relief for US equity markets, especially now that the world knows “the real trade is to ‘Sell America’.
As you’ll see in today’s report, there is a tremendous about of “doom” pulsating throughout markets and the economy. But so far, that doom has been concentrated to leading indicators, such as surveys. Sure, we’ve read some of the anecdotal comments from businesses via the newspaper. But by-in-large, none of that has shown up in the data just yet.
And that’s why, despite today’s plethora of “doom” charts, I think we need to be cautious about becoming overly bearish at this point in time.
Up until this point, the entire trade has been about sentiment. Chaos, uncertainty, fear. Sure, we still don’t have any firm answers on how this will all play out. And I certainly don’t believe there’ll be zero negative impact, even if we do finally hear of some positive trade deals.
But, in my opinion, the next leg of the bearish trade likely won’t play out until we start to see it manifested in the ‘hard data’. Even if we go by company earnings reports – most of them have simply withdrawn guidance. Others have chosen to go the route of a providing a binomial outcome. If tariff measures stay intact, things will be really bad. If they’re dialed back, things will probably be closer to previous guidance.
And that’s why I don’t think there’s really any juice on either side of this trade until we see more in the hard data. If things are really bad, maybe earnings fall 20%. That would make current valuations extremely unattractive. If things aren’t so bad, maybe earnings rise 5%. Still makes equities a bit expensive, but not disastrously so. The point being – we won’t know until we know.
My concern is, investors/traders – both professional and individual, alike – have become overly emotional with respect to how these first four months of 2025 have played out. The ones who were bearish now believe they were correct all along and there’s nothing to stop the runaway bear market. The ones who were caught long because they believed in ‘Trump will be the most pro-growth, pro-equities President in all of history’ have gone one of two ways. They’ve become disillusioned and feel hurt that he could do such a thing and thus have become emotionally angry. Or they’re doubling down that this is all still part of some grand plan.
Point being, no one has a clue of how these next few months will play out. Could emotions and negative headlines drive some more downside? Absolutely. Could emotions and positive headlines provide a bit of relief? Absolutely. To me, the best way to put my current outlook is that there’s just really not much to do with US equities until we have more information.
You know, it’s funny because I do give the Federal Reserve a lot of crap about being so backward-looking. It’s the old “driving while looking in the rearview mirror’ theory. Do I believe they’re at risk of a major policy mistake, insisting that tariffs are inflationary and thus remaining on hold amidst hints of a drastically slowing economy? Absolutely. But, in all honesty, what else can we expect them to do at this point in time? Sure, I think it’s a little disingenuous that Fed speakers continue to pound the drum of, “the hard data says the economy remains strong.” But again, if everyone else is in ‘wait and see’ mode, it’s hard to be overly critical of the Fed for doing the same…
Speaking of which, here are a few comments from recent earnings calls…
JPMorgan Chase CEO Jamie Dimon: “And anecdotally, a lot of people are not doing things because of this. They’re going to wait and see… So, people have to adjust to this new environment.”
Wells Fargo Director Charles Scharf: “People are cautious. So, I just kind of put it in the wait-and-see category. Cautious in the short-term, but probably still bullish for the longer term.”
Expeditors International Senior Advisor Customs Ted Henderson: “A couple of importers just yesterday, and they’ve chosen to suspend imports for a while… I know this won’t work for everyone, but it might be good just to hit the pause button if you can do it.”
Aehr Test Systems CEO Gayn Erickson: “If that prober landed in the port tomorrow, it’s going to get hit by a tariff… So, I think people are like, well, let’s wait and see what happens.”
Richardson Electronics General Manager Greg Peloquin: “There’s a couple of large Pos we’d like to place because of lead times, but we’re just kind of maybe holding off… So, I think a lot of people are just kind of a wait and see for a while in terms of placing any large orders.”
Unless we get some sort of major resolution that allows investors to “look through”, Q2 is probably where the rubber meets the road. It’s where all of this “wait and see” or “holding off” will really start to impact company earnings. But spoiler, that data won’t be coming from companies until July/August. That’s three to four months of meaningless fluctuations based off of emotions – hope, fear, excitement, despair, confusion, anxiety, uncertainty, chaos, the list goes on…
I know this was a pretty long-winded way of saying it, but all of this means I’m simply renewing my call from last week’s report – I’d expect to see a whole bunch of back-and-forth chop around these technical levels in US equity markets.
All of this being said, I’d still like to reinforce my call that foreign equities are the place to be. No, this is not in the same “Sell America” sentiment as espoused by the media. What this has to do with are the things we know, the things we can observe. Like in Germany, where there’s a very strong fiscal tailwind for infrastructure upgrades and rearming militaries. Like in Greece, where tax cuts and increased fiscal investment should drive a continued rebound for an economy still recovering from its own austerity-driven crisis. Like in Latin America, where major political shifts are underway. Oh, and did I mention that these are also areas that are being supported by more accommodative monetary policies, as well?
Just as with anything in life, the most important thing we can do is focus on what we can control. We can’t control the chaos, and we can’t control the emotions of others. Let others tire themselves out running in circles over every little headline.
