14 Apr 14th April 2025
Index Movement Last Week
| S&P500 | +5.7% |
| Nasdaq | +7.4% |
| Aussie ASX200 | +0.1% |
That was a very interesting week and one in which Trump just learnt who the 900kg Gorilla in the room really is.
Everything changed on Tuesday when Trump took notice of the Bond Market.
The Bond market is about 3 times the size of the stock market. What happens there is much more important to a country’s economy than what is happening with stocks.
When the stock market was putting back-to-back 5% down days in at the end of the prior week, the yield on the US 10yr and 30yr Treasuries were increasing. The 30s went from 4.4% to 5%. Whilst that does not sound like a lot, it is for that market. What is also interesting is that usually when stocks fall sharply, Treasury yields rise on a flight to safety. Not so this time. This time someone was selling Treasuries at the same time as stocks.
That is a big problem for a country as it means funding for everything gets more expensive, which then means less spending and economy slows etc…It also means funding for government gets more expensive and when you run a $36Trillion debt then repayments of that become hard.
Tuesday was when Trump realised there is a bigger bully in the room. Trump thinks he is in charge, but he isn’t. The markets are in charge.
There is a rumour flying around that it was Japan selling Treasuries and I sorely hope this rumour to be true. The story goes that just as Japan were negotiating tariffs with Trump, they were pushing the bond market around.
In my mind I picture an event, much like the televised Trump-Zelensky meeting where the Japanese say
“Before you make a decision on a trade agreeement with us Trump-san, please take a look out the window at what is happening to your bond market”
You might have heard speculation of a Trump Put? That is an option term and it means Trump does not want to see the S&P500 below 5,000. I disagree. The stock market is not big enough to cause Trump to change policy simply because it hit 5,000.
But the bond market is and we know it was bonds that caused the about face because Peter Navarro said on Fox Business that “we’ve got the bond market behaving well now,” implying that the bond market dislocations of the last few days were important in the walkback of the tariffs.
Additionally we saw Treasury Secretary Bessent join a White House briefing and tell reporters that the bond market had nothing to do with the President’s decision to retreat from the tariffs announced last week. (A clear attempt at denying the truth).
Every member was talking bonds and not stocks.
Japan is the largest holder of US Treasuries. China is second. They have enough to push the yields around and whilst doing so might hurt them financially, it sends a clear message to Trump.
This is why stocks rallied and produced the third largest move ever on Wednesday. Not because Trump paused tariffs for 90 days, but because the market knows Trump will pay attention to yields and back down if they move too high. Japan and China can move them high if they desire. Trump knows this and so is now in the tricky situation of trying to reduce national debt when his first tool of choice has been taken away from him.
What happens next? I suspect volatility dies down and markets drift higher.
Things are not over yet. There is still a high degree of risk, but that risk is a lot less than it was perceived to be the week before.
Over the weekend, Trump announced essential chip manufacturing is exempted from Chinese tariffs in a major rollback of tariffs imposed against China. That will be a welcome headline to all you Apple holders and is yet another reduction after the debacle that was the original announcement.
My prediction is new trade agreements are rolled out over the next three months and Trump claims a huge victory with them, even if they do make things worse than they were originally.
The idea that US companies will relocate manufacturing to America is absurd. Firstly, just who in America is willing to work in a factory for Nike making shoes on a production line? US unemployment is very low. For every unemployed person there is a job advert wanting someone to fill a role. Where will all the factory workers come from if manufacturing does return? Remember, they have cut immigration to. Can you really see Billy-Bob sitting at a sowing machine in his dungarees finely sowing garments together?
There is no way companies relocate. They will carry on and wait for a change in administration. In 3.5 years we will have another election. The Democrats have to simply run on the promise “we will roll-back tariffs and you will get cheap goods again”.
Your favourite Nike runners in Australia will still cost you the same as we won’t have to pay tariffs here. But they will almost double in price in America, who will experience a second round of cost of living pressures. That alone will be enough to see a big swing back to the Democrats at the next election.
The biggest risk is companies place a hold on all expansion plans because the environment is so uncertain. We will hear a lot about their intentions in the next few weeks as earnings season starts now. Their results won’t matter as it will be the past, but comments from CEOs on future plans will determine the outcome. Expect many to completely withdraw guidance.
So we could still have a fair bit of movement from individual stocks over the next few weeks.
But, ask yourself this question – what does the world look like in 5 to 7 years time? Trump will be gone. Putin and Xi might also be gone as they are both aging also. What will the world look like? And therefore, is now a good time to buy?
I saw yes. Mainly because I believe in the basic human drive for expansion and profit. That will never go away and is why stock markets will always make new all time highs. It is just a matter of time.
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.