April | 2025 | Wellington Shields & Co. LLC

Direct From Dudack: Retaliation

Posted on 04/04/202504/04/2025 by Andrea

The early morning news that China is retaliating with 34% tariffs on all imported US goods starting on April 10^th is feeding fears of a recession and a global trade war. China is perhaps in the best position of all countries to retaliate, but equally important, it poses the possibility that other countries will follow suit. This would, of course, be the worst-case scenario for the Trump administration. China’s move has also been the catalyst for several Wall Street firms raising the odds of a recession in the US to more than 50%. Likewise, the high yield corporate bond yield spread soared to 401 basis points, its widest since November 2023.

Today is also employment day, but since the federal employee cutbacks are unlikely to have an impact on the numbers yet, we expect this report will be benign and show slow steady growth in jobs.

There are many possibilities regarding tariffs at this juncture. The Trump administration could announce a number of carve-outs, along with successful negotiations with countries where tariffs have been lowered or totally eliminated and call on China to come to the negotiating table. This would be an opportunity for further negotiations that would lower tariffs and trade barriers across the board and help define an end game for the administration. Or, since nearly all of President Trump’s actions have been challenged by various groups and district attorney generals in the court system, tariffs could follow suit. If so, the court system could stall and potentially block the administration’s entire tariff regime. Or the worst case would be a full-blown tariff war, triggering fears of a global recession.

Today is the last day of the week, a lot of news could unfold over the weekend, and this makes it unlikely that traders will be willing to take a major stand on stocks today. Not surprisingly, markets look like they will open substantially lower. This reminds us of other major panic lows, such as in 1987, in which sequential downdrafts on Thursday and Friday were followed by a huge selloff on Monday morning, until the market reverses on Monday afternoon. Many major bear markets have ended in a similar pattern.

However, what is still missing in our technical indicators is extreme panic, which is identified when 90% of the daily volume is in declining stocks. Yesterday’s session was an 87% down day but it fell short of 90%. These 90% down days are helpful in a bear market because they usually materialize in a series, and the appearance of a 90% up day helps to identify the low – it indicates that the worst of the decline is over. In sum, a 90% up day denotes buyers have returned to the market with conviction. (Our indicators use NYSE volume only in order to eliminate the noise of program/algorithmic/day trading which does not reflect a market stance.) Since we are yet to see a 90% down day, and panic is clearly in the air, investors should be cautious in the very near term since one is apt to appear. The news surrounding the announcement of “Liberation Day” tariffs is purely negative, and though we have a difficult time finding a positive side, we cannot help but think of the Chinese word for “crisis” which is the combination of the characters for “danger” plus “opportunity/inflection point.” For long term investors remember that even though earnings forecasts will also be in flux, falling prices are finally generating value in the equity market.

Gail Dudack

Click to Download

Rip Up That Script

Posted on 04/04/202504/04/2025 by Andrea

DJIA: 40,545

Rip up that script…anything you wrote or thought on Wednesday afternoon. The market isn’t always right, but rarely is it as wrong as it was to rally on Wednesday. We understand the logic, which we toyed with ourselves, ‘sell the rumor, buy the news.’ It worked when Russia invaded Ukraine, but it’s not looking good right now. The history of tariffs simply isn’t a good one. And while there’s always the possibility of some rollbacks, it’s hard to roll back uncertainty. The market hates uncertainty, and the current backdrop reeks of it. History could have proven helpful here. Failed rallies after 10% declines often yield to another 10% decline, and quickly. History also suggests we need what we did not get a few weeks ago – a spike in the VIX and oversold levels of 20% or less in stocks above their 200-day average. In a market like this, it’s best to let the dust settle, but only after you have sold down to the sleeping point.

We have liked IBM (243.55) for a while, though that “international” aspect is not what we want for the moment. Staples and other defensive names acted well Thursday, despite many of them having international exposure as well. Utilities are about as domestic as you can get, including AT&T (T – 28.58), and Verizon (VZ – 45.62). Insurance shares may also fit in here, IAK (136.57) is the ETF there. It is somewhat amusing to see Buffett and Berkshire (BRK.B – 530.68) outperforming Musk and Tesla (TSLA – 267.28). Gold may need a rest, but still makes sense, and there’s the ultimate flight to quality, Treasuries.

Frank D. Gretz

Direct From Dudack: Tariff Turmoil Finale

Posted on 04/03/202504/03/2025 by Andrea

President Trump’s “Liberation Day” tariff regime was far more extensive and specific than most analysts, and we, expected. Global markets are responding with shock and big selloffs across the board. However, some key areas like pharmaceuticals and semiconductors are exempted and we expect some countries will soon be lowering or eliminating their tariffs on US imports and the US will respond in kind. For example, Israel eliminated all tariffs on US goods prior to April 2, yet this was not mentioned by President Trump at the press conference. Perhaps the administration is waiting to hear from more countries regarding tariffs and will make a larger announcement later this week on the fallout of “Liberation Day.” In terms of transparency, the table shown at the White House announcement regarding tariffs on US exports by country and the “reciprocal” tariffs being imposed was revealing in terms of tariffs on US exports. Some are challenging the White House numbers, but the tariffs being imposed by the US were never larger than those imposed on US exports, and in most cases substantially lower.

Nonetheless, it appears that the administration is not just making a statement regarding the uneven playing field of tariffs on US exports versus US imports but is going for a longer-term shift of bringing manufacturing back to the US. This will take time. And it appears that President Trump and his team are willing to see inflation benchmarks rise in the near term in order to bring more jobs back to the US and improve GDP in the longer run. The media will focus on this short term negative, but investors should focus on the longer-term positive.

What is certain in this time of uncertainty is that the worst of the potential tariff impact is probably being announced and discounted by the financial markets today. There may be a few country leaders that will attempt to start a tariff war, and that will get worldwide attention, but we doubt it will work out well for these countries. It important to remember that the US is the largest consumer in the world and from that perspective, losing the US consumer will hurt any country negotiating with the US from a standpoint of pride rather than logic.

Again, the average household may soon see price differentials at the grocery or retail store, but consumers have options of what to buy and often have substitutes. The beauty of America is that creativity abounds and in time we expect local entrepreneurs will step into areas that will be impacted by tariffs to create a non-tariff option.

In sum, this announcement comes as the equity market is retesting its February 13, 2025 low and those lows could easily be broken temporarily. But in the longer run, we see this as a buying opportunity.

Gail Dudack

Click to Download

Tariff Turmoil

Posted on 04/01/202504/01/2025 by Andrea

In our April 2024 Quarterly Market Strategy Report we wrote “if the stock market is forming a bubble, and we think it is, it is still in the early stages. PE multiples are exceedingly high at 24.2 times trailing 12-months and 21 times forward 12-months earnings. Yet during the 1997-2000 bubble, the financial crisis of 2008, and even the post-COVID-19 peak, the trailing 12-month PE reached 26 to 30 times.”

We mention these comments from a year ago because the world seems to have changed so much in the two months since Donald J. Trump became president. But given these comments from a year ago, Trump’s tariff threats and the uncertainty they created may have been the trigger the market required for an inevitable correction. In short, a pullback in the market was overdue, and the uncertainties surrounding tariffs were the catalyst. As we expected, the equity market continued to rise last year and by February 19, 2025, the S&P 500 was trading at 26 times trailing earnings and 22 times forward 12-month earnings. This forward PE of 22 in February was well in excess of the long-term average of 14.3 times. In short, from a valuation perspective, it is not a surprise that the equity market had one of its weakest first quarter performances in years.

Testing the Lows

At the March 13, 2025 closing lows, the peak-to-trough declines in the S&P 500, Dow Jones Industrial Average, the Nasdaq Composite index, and the Russell 2000 index were 10.1%, 9.3%, 14.2%, and 18.4%, respectively. This means that the S&P 500’s selloff was just short of a 10% drop that defines a correction, and the Russell 2000 declined just short of the 20% drop that defines a bear market. Yet, many of the technology stocks that had been the drivers of the 2024 bull market fared much worse. For example, Nvidia Corp. (NVDA – $108.38) had a two-month peak-to-trough decline of more than 28%. In other words, depending upon the index or stock you choose, equities have been in full-blown correction or bear market in the last two months. By the end of March, the declines of 4.6% in the S&P 500 and 10.4% in the Nasdaq Composite index in the first quarter were the worst since 2022.

As the April 2 deadline for President Trump’s tariffs approaches, the equity market is retesting its March lows. From a technical perspective, a retest of the lows is a normal scenario and part of a classic bottoming process. There are several factors that suggest a bottoming process is at hand. The S&P 500 seems to be stabilizing after it experienced a 10% correction, the Nasdaq Composite index rebounded off its 2022-2025 uptrend line and the Russell 2000 index bounced off its pivotal 2000 resistance/support level. These were all important levels of support. Rebounds from these levels make it likely that the worst of the “fear of tariffs” may be over. In addition, the American Association of Individual Investors’ survey showed that bullish investor sentiment tumbled to 19.4% and bearishness jumped to 60.6% at the end of February. A combination of 20% or less bullishness and 50% or more bearishness in this indicator is rare and has been a positive sign for the market. The 8-week AAII bull/bear index is as low as it was in November 2022, just after the S&P 500’s 25% decline to 3577.03 on October 12. In short, this high level of pessimism is associated with major market lows.

The Impact of Tariffs

What history has shown is that financial markets can deal with good news or bad news, but it does not do well in a time of uncertainty. With the 25% tariff on foreign car imports now permanent and the April 2 deadline for reciprocal tariffs on the horizon, the fog of uncertainty regarding tariffs should soon begin to dissipate. That is good news.

Most economists are describing tariffs as a tax on consumers, but we disagree. Taxes of all kinds are unavoidable, and they are mandatory. Tariffs make imports more expensive, but consumers usually have choices in terms of what they buy or do not buy. In the case of vehicles, American-made vehicles will be a more attractive alternative in the future, and we expect to see consumers buying more American-made and less foreign-made vehicles. The same is true of liquor, wine, and many other products. More importantly, despite what many economists are saying, history has shown that tariffs are rarely passed on directly to the US consumer. In the past when tariffs have been levied, exporters often choose to lower prices, or in the case of China, a country can subsidize exports to the US. Domestic retailers can choose to absorb part, or all of the tariff increase in order to keep prices stable for consumers. This means that inflation may be far less than expected, but many companies that import products or parts from offshore will face margin pressure. From this perspective, the biggest negative from tariffs could be lower margins and lower corporate earnings.

If tariffs persist for a long while (and there is no certainty that they will), we expect consumer behavior will change; consequently, in the aftermath of tariffs, some companies will be winners and some will be losers. But keep in mind that the April 2 “Liberation Day” tariffs will be excluding a variety of necessities such as semiconductors and pharmaceuticals, and as a result, the overall impact will be less broad based than currently forecasted.

It is also important to remember that the US is the largest consumer in the world with a 2024 trade deficit in goods and services of $918.4 billion. The deficit in goods alone reached a record $1.2 trillion in 2024. Our largest trade deficit was with Mexico, and it hit a record $171.8 billion last year. The US had record imports from 50 countries in 2024, led by Mexico ($505.9 billion), Germany ($160.4 billion), and Japan ($148.2 billion). This trilogy of imports may explain Trump’s focus on imported vehicles. Conversely, the 2024 petroleum surplus was the highest on record at $44.9 billion.

Overall, these statistics explain why the threat of tariffs is a powerful negotiating tool for the US. And despite the current anguish about tariffs, if the tariffs become permanent (which we doubt), the negative impact on our trading partners is apt to be far greater than it will be domestically. Therefore, in our view, our trading partners are more likely to sit at the negotiating table and look for a compromise, than to start a true tariff war.

Sentiment Bias

In this highly politicized environment, it is worth discussing the bias currently found in consumer sentiment indices. The recent University of Michigan consumer sentiment for March fell 7 points to 57. The current conditions component eased 1.9 points to 63.8, and the index of consumer expectations plummeted 11.4 points to 52.6. Nevertheless, these numbers appear to be highly skewed by political party affiliation. Party affiliation data has a one-month lag, but the index of consumer expectations for Democrats fell 12.6 points to 36.8 in February while Independent expectations dropped 6.4 points to 59.1. Conversely, the Republican expectations index rose 2.3 points to 106.6. This data suggests that consumer sentiment data is skewed politically and has a negative bias.

The University of Michigan survey also reveals that optimism, or pessimism may be highly correlated to the news source one chooses to follow. When respondents were asked “during the last few months, have you heard of any favorable or unfavorable changes in business conditions?” the 3-month moving average of Democrats fell 40 points to 29 while the same index rose 13 points to 101 for Republicans. Independent voters had a 9-point decline to 53. This bias in sentiment indices suggests that much like presidential election polls, consumer sentiment indicators may not be a good forecaster of outcomes.

All in all, retail sales may be a better predictor of the health and sentiment of the consumer than sentiment indices. Many indicators point to the market being in a bottoming formation in March and that implies an opportunity for investors. However, individual companies may be helped or hurt by tariffs. This means keeping portfolios diversified and avoiding companies that could face potential margin compression in the year ahead.

*Stock prices are as of March 31, 2025 close.

Gail Dudack, Chief Strategist

Click to Download