BY: Jim McElroy

Bull

The name for a male bovine has many uses in the English language.  Besides its zoological use, which includes describing the male of just about any animal species, “bull” can describe a person of great clumsiness and destruction — a bull in a china shop — or of maddening stubbornness.  And, of course, it’s also used as an exclamatory reaction to a clearly untrue or ridiculous statement.  Normally, we prefer to associate the word with markets, when it denotes positive price moves of 20% or more above a prior low.  So far in 2025, however, we’ve been forced to consider the more chaotic meanings of “bull.”

Historians often remark that the first one hundred days of a president’s term in office are critical to the realization of his agenda.  Donald Trump, returning to the executive office after an interregnum of four angry years, has spent the first seventy days of his second term slashing, gashing, and otherwise trampling on the political and economic status quo of Washington.  Because he has only four years to be disruptive and transformational (or less, depending on mid-term congressional elections), he’s not wasting any time.  One of his first bull acts has been the imposition of punitive tariffs on America’s largest trading partners.

Trump’s argument for tariffs is that they will return more manufacturing jobs to America.  Taxing domestic importers, he argues, will encourage them to buy more domestically sourced products and persuade overseas manufacturers to move factories to the U.S., all creating more jobs for Americans.  Because the U.S. is the world’s largest economy, as well as the world’s largest consumer, our trading partners — Europe, Canada, Mexico, China — have more to lose in a battle of tariffs than does the U.S., but that doesn’t mean the potential for domestic suffering is insignificant.  Tariffs will likely drive up consumer prices while lowering corporate profits, potentially leading to layoffs. And because it takes months and years, not days, to find new product sources, build new factories and hire new employees, the benefits to the domestic economy will be delayed and the risk of stagflation (higher inflation combined with slowing economic growth and rising unemployment) is a strong possibility. Trump himself allows that there could very well be some necessary pain, either from higher inflation or an economic recession, but that these discomforts will be slight or short-lived.

There are at least two bulls running loose in Trump’s tariff gambit, both personified by Trump himself: Trump, the bull in the china shop, aggressively breaking decades-long trading norms and Trump, the author of The Art of the Deal, suggesting to our trading partners that he might just be crazy enough — surely he’s bluffing — to push everyone into a recession in order to win terms more favorable to the U.S.  As one would expect in the early days of a trade war — essentially a suicidal game of chicken — our trading partners have threatened to match and, in many cases, double down on their own tariffs.  Time here is critical: the longer a trade war lasts, the more damage that will be sustained by all the participants.  No one wins in a trade war: at the end of the day, after a truce is declared, overall trade among nations begins again at much lower levels.  At some point — soon, we hope — all participants will come to recognize that mutually agreeable terms of trade are more desirable than the mutually assured destruction of a trade war.

This time last year, the primary driver in the markets was the Federal Reserve and its deliberations on the timing and magnitude of cuts in the Fed Funds rate.  On March 31, 2024, this rate stood at 5.25%.  The consensus then was that there would be three .25% cuts before the end of the year and that the Fed Funds rate would settle at 4.5%.  In support of this consensus, the yield on the two-year U.S. Treasury Note — a proxy for the market’s expectation for the Fed Funds rate, twelve months ahead — stood at 4.5%.  The consensus was mostly correct: the Fed did cut three times, but its first cut was for .50% and the remaining two were for .25%; the rate now stands at a range between 4.25% and 4.3%.  Last year, before there was an inauguration and a “trade war,” when post-election euphoria about diminished regulations and the extension of existing tax cuts fed a more positive bull, the S&P 500 climbed to a record high of just under 6100.  During this time of easing, the S&P 500 gained 16.9%.

Now, with the impact of tariffs on inflation and economic growth uncertain, the Fed is in no hurry to make further changes: following the Fed’s most recent meeting, Chairman Powell opined, “We think it’s a good time for us to await for (sic) further clarity.”  The current yield on the two-year U.S. Treasury Note is 4%, suggesting only a .25% decline in the Fed Funds rate (currently 4.25%) over the next twelve months.  Without the engine of declining interest rates, further market advances will depend largely on the expectation of earnings growth, an expectation subject to great variability due to tariffs and tariff threats.

Given this uncertainty, it’s no surprise that the S&P 500 registered negative numbers for the first quarter and year to date (-4.59%).  Although still in a bull market (now two and a half years old), the S&P 500 has entered its second correction, giving back 10.1% from its previous high.  There has been some recovery from this correction, but the market remains vulnerable to more tariff- induced chaos.  The valuation on the S&P 500 before this past quarter’s correction was 26 times expected earnings, not a record, but certainly well above the average multiple of 16.  Subsequent to the correction, this multiple has declined to 20.5, still well above average and perhaps a little high for a market and an economy possibly expecting tariffs, higher inflation, a recession or stagflation.

So far the economic data appears to be benign.  Core inflation (3.1%) is still above the Fed’s target rate of 2% but has declined over the previous month.  Corporate earnings are definitely not forecasting a recession.  And initial jobless claims remain in a healthy zone.  Nothing is flashing red.  Skeptics, and we often count ourselves among them, will say that by the time danger shows up in the statistics, it’s too late to avoid the pain.  It is possible that much of the chaos of this past quarter has been “bull” (defined as nonsense) and that the effect of the new administration in Washington will not be nearly as disruptive as advertised.  We certainly don’t know how bumpy 2025 will be.  But, just to be safe, seat belts and diversification are strongly recommended.

Not Investment Advice or an Offer
This information is intended to assist investors. The information does not constitute investment advice or an offer to invest or to provide management services. It is not our intention to state, indicate, or imply in any manner that current or past results are indicative of future results or expectations. As with all investments, there are associated risks and you could lose money investing.