10 Mar 10th March 2025
Index Movement Last Week
| S&P500 | -1.0% |
| Nasdaq | -3.4% |
| Aussie All Ords | -2.0% |
The stock market swings are intensifying.
Every day in the past week, the S&P 500 either increased or fell by 1% — generally the latter — as uncertainties around the path of economic growth, particularly President Trump’s proposed tariffs, have weighed on investors.
The S&P 500 and Nasdaq just had their worst weeks in six months. The S&P 500 is now about 6% off its most recent all-time high, while the Nasdaq Composite is now in a correction, off more than 10% from its most recent high.
But other markets are not reacting. Corporate Bond spreads are still lower than at any point in 2021 which means this market sees no fear of significant economic slow-down. Fed Chair Powell thinks the same saying:
“Despite elevated levels of uncertainty, the U.S. economy continues to be in a good place. The labor market is solid, and inflation has moved closer to our 2 percent longer-run goal.”
If you’re worried about tariffs or any other topic du jour, keep in mind that the market will likely be thinking about something totally different a few weeks from now. Remember a month or so ago when higher rates were the big concern? Or a couple weeks ago when it was DOGE Cuts? Interest rates have done nothing but drop since, and earlier this week DOGE got throttled by the President and the Senate. If you’re thinking long-term, it’s not healthy to get riled up about day-to-day noise It usually just causes you to make mistakes in your long-term plans.
Use these periods to get set for the next swing higher. As there is one thing you can count on. Stock markets will make another new high. We just don’t know when, so use these lower prices to buy and then sit back an relax while you wait for the inevitable recovery.
The Unexpected Impact of Tariffs
Anyone reading this will already know that Trump has slapped Mexico, Canada and China with tariffs and they are retailiating in much the same way with tariffs of their own.
Markets are getting spooked because they don’t know what the impact of this will be. Will it slow economies? Will it raise inflation? Traders are not waiting to see and have been taking risk off the table.
But there could well be some long term, unexpected impact.
Let me tell you a story about The Chicken Tax.
In January 1964, then-US President Johnson imposed a 25 percent tariff on imports of several foodstuffs (brandy, dextrin, potato starch) and light trucks. This was in response to a new European tariff on chickens, of all things.
The food related tariffs were eventually reduced, but the 25 percent tariff on imported light trucks remains to this day.
The tariff was originally aimed at European car makers like VW and Daimler-Benz, but it also applied to Japanese and Korean car makers as they started to target the US market.
Because of the “Chicken-Tax”, US automakers had the light truck and SUV market to themselves for many years. That allowed them to pay less attention to the car market. US automakers focussed on the highly profitable light truck segment and didn’t see the car market as important as margins were much lower.
That left the Japanese and Korean players to focus on improving their business models in this area. Their US dealerships increased and they grew market share on the back of car offerings. When they got to critical mass, they started building assembly plants in North America. Products made there were not subject to tariffs.
The end result was the decline of the entire US auto industry. The exact market the tariff was supposed to protect. In the short-term it saved the industry, but long term it turned the US industry away from its bread and butter markets and into niche areas. And it never recovered.
The moral of the story is – tariffs cast a long shadow and we cannot see the long term impacts before it will be too late.
Significant Events in Europe
Something very significant happened in Europe last week and it gained little attention in the media due to everything else that is happening.
Germany has always been very careful with spending money. They have a limit to how much debt the Government can go into. There was a plan to use EUR200bn for defense spending in support of Ukraine. However, last week they changed the law to say any spend in excess of 1% of GDP on defence would not go towards their debt limit. Currently, German defense spending is about 1.3% of GDP, but under this plan that would only count as 0.3% when it comes to deficit limits, and further increases would no longer count.
Second, a new infrastructure fund totaling EUR500bn would be rolled out to finance higher rates of public infrastructure investment over the next ten years. Transportation, energy, and housing are planned areas of focus.
The final plank of Germany’s turn to fiscal expansion allows further loosening of fiscal rules that permit increases in investment spending on an annual basis. These numbers are very large and will significantly alter the landscape of the German economy as well as that of the Eurozone more broadly given Germany is its single largest share of output. It will reorient production to internal demand, something which has been desperately needed for decades.
All up this is a dramatic fiscal shift. In laymans terms it means Germany is going to borrow more money and spend it. The European Central Bank will lend them these funds by printing money.
I trust by now you know what happens when Central Banks print money (like they did for the Pandemic). In a short time we have high inflation and a cost of living crisis.
Does anyone think these actions by Germany will have a different outcome? No. They have just significantly increased inflation threats in Europe.
Now, if you also recall, before we were moaning about a cost of living crises, asset prices increased significantly. So we thought it was great to begin with. Until it wasn’t.
There could be a short-term (I’m thinking several months, maybe even to end of the year) trade here.
Buy EWG – The German DAX ETF.
As I think broader about this, I can also see bigger problems coming down the line. Trump is issuing Tariffs like a teacher issues detention notes and countries are retaliating. Theory says this will be inflationary. Europe is adding to inflation in a different way.
It will take a while to play out, but rising inflation is the one big threat to the markets.
We need to keep a watch out for any signs it is coming.
Taiwan Semiconductor (TSM)
TSMC supplies semiconductors to companies like Nvidia and Apple for uses in AI and has been making strides to expand its U.S. footprint. This week they announced they are putting up another $100bn to build five new fabrication facilities in Arizona. That brings the total US investment to $165bn.
Is this a safety move to relocate out of Taiwan in case China decides to step over the line?
Who knows? But it could well be an insurance policy for them.
History Repeating
Some time back I showed you how similar the Nasdaq is trading since the October 2022 introduction of ChatGPT to how it traded at the introduction of Netscape in December 1994.
That relationship continues to hold as you can see below and if we can rely on this then we should all be buying QQQ this week.
Warning
Stock values can go down as well as up. It is possible to lose 100% of your investment in a stock. Any advice given by Capital 19 is general advice only and does not take your personal circumstances into account and might not be suitable for you.