07 Apr 7th April 2025

Index Movement Last Week

S&P500	-9.1%
Nasdaq	-9.8%
Aussie ASX200	-8.0%

It is often a humbling experience being a stock market commentator and I must admit I read this one very wrong.

I was operating under the assumption that Trump cared more about his image and legacy than anything else and was just using tariffs as a threat to gain co-operation from other countries. Much as he did before, threaten Canada and Mexico and then roll them back the very next day.

I failed to understand that either he is a genius that can see what no-one else can, or he is an idiot. it would appear he did this without the support of the full party by using an obscure emergency action rule. Without it he would need the agreement of Congress. Charging importers a tax does not really fit the “emergency” bracket if you ask me.

Then there is the calculation of these tariffs. A high school kid would have done a better job. Rather than investigating what other countries actually do place tariffs on, he simply took two columns in an excel spreadsheet.

Column A = How much the US imports from the country

Column B = How much the US exports to that country.

In his model, the difference between these is a tariff imposed by that country and he is such a nice guy his tariff to that country will only be half of what this fictional number is.

I don’t even know where to start with this one as it makes so little sense.

But enough of me moaning. What we really need to do is work out what we should do as investors.

You saw what the stock market thinks. An 11% fall in 2 days. I have only seen this twice before. During the GFC in 2008 and Covid in 2020. So the size of this move is truly unusal. It is once in a decade stuff. The difference this time is it is all man made. It happened simply because of the decisions made by the President.

The moves tell me the market is starting to discount a recession. If a recession were to happen then we can expects stocks to fall 50%. A 50% fall would mean an S&P at 3073. It is now 5074 so a recession could mean a further 40% downside.

But we are a long way from recession. Employment numbers last week were strong. Company profits are all time highs. Profit margins are very close to highest ever too. There is no evidence of a coming recession.

So I don’t think that 3073 is a realistic target.

Another way to calculate a target would be to take the forecast earnings of $270 and multiply that by the average PE of 19 to get 5130. But stocks always overdo moves to the upside and downside so lets take another 10% off that and arrive at 4617.

That feels a lot more realistic.

Altough the feeling here is very bearish, there are several reasons to be bullish.

The truth is no one knows the impact of these tariffs because we are in unchartered territory. I doubt any company will relocate their manufacturing to the US. It would take several years to build a manufacturing plant in the US. Whereas Trump could change his mind at any time, or we could lose Congress in two years or the next election in 4 years can reverse everything. No CEO is making a long term decision here when the runway is really only 4 years.

I also would not be surprised if someone challenges his use of emergency powers in the court and it gets reversed in that way.

So, I don’t think we are in a recession risk zone here but I do acknowledge a reversal is unlikely to occur in the short term. We need a change of policy to see a powerful rally. But that could happen anyday.

After all, this is a single decision problem, so can be fixed by a similar single decision in the future.

What follows I wrote at the beginning of last week. Feels a bit irrelevant now, but I might as well include it.

First Quarter Performance

The first quarter is now in the books, and it has been one many of us would like to forget. The matrix below is from our friends at Bespoke and contains a lot of data that shows how the quarter went and also how things have moved since the election and the high on February 19th.

We can see that US small caps and growth have been hit hard but rest of world stocks have done fairly well. This is more a case of rest of world playing catch up than any meaningful long term trend. Although, Europe probably does have a little more to run on the back of Germany’s massive stimulus.

Dividend payers were the standout, and one we often see as a safe bet in times of uncertainty.

When we look for underperformance against the S&P500 then the only thing that really stands out is crypto which is in another winter.

Silver and Gold has a ripper quarter, once again being used to park cash in times of uncertainty.

I’m Just Glad Its Over

It’s over. Thankfully. With a decline of 10.4%, the Nasdaq just experienced its 28th quarterly decline of 10% or more and the first since Q2 2022. It seems hard to believe now, but less than six weeks ago, the Nasdaq was up nearly 4% on the year.

The last three months may have been painful, but if it’s any consolation, the Nasdaq’s performance following prior double-digit quarterly percentage declines has been positive. Over the following quarter, the index averaged a gain of 5.2% (median: 7.9%) with gains two-thirds of the time. Over the next year, it averaged a gain of 17.5% (median: 25.0%) with positive returns just under three-quarters of the time.

If history is anything to go by then things should get better from here.

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.