Trump and Tariffs: What If It All Goes Right?

Are there deals that are possible?

And finally, we're gonna talk about the state of the consumer because all these things are kind of. Connected. Right.

[00:00:23] Chris Versace: I would say they're connected and all three of them are driving the market as we know it today. Uh, a lot's gonna happen over the next week, Lindsey. I look forward to breaking it all down.

[00:00:35] Lindsey Bell: All right, well, we're gonna take a quick little break here and we'll be right back.  

Welcome back, everybody. Let's dig right into it, Chris. Inflation, we get PCE on Friday. It is the Fed's favorite rate of inflation. There are several other measures. Um, is this gonna be matter? What are you expecting at the end of the week?

[00:00:55] Chris Versace: Well, uh, I don't mean to blow your hair back, Lindsey, uh, but I could care less what the report has to say. So the simple, simple reason, it's February data at this point, we are well past it. We already know that inflation is, you know, at best, sticky, more likely moving in the wrong direction. And, uh, you know, that's fine for the month of February.

To me, what we saw on Monday of this week, the, um. Lemme get this right. I'm gonna, I don't wanna discombobulated myself. It's the S&P flash March PMI data, uh, snapshot on, um, the manufacturing sector, the services sector, but underneath a lot of great commentary that, you know, I certainly look at every month.

I suspect you do too. And it, what did it show? Guess what, in, uh, input costs rising. Output costs rising. So this is March, so it tells us that, you know, it's going to get a little bit worse. And then on top of that, I, I think we might touch on this, but if you didn't see it, Lindsey, in the march, consumer confidence, uh, report, 12 month inflation expectations jumped to 6.2%.

That's up from 5.8% in March. We know all we need to know about inflation. The Fed's, you know, favorite metric, be damned.

[00:02:20] Lindsey Bell: Well, I think there's a couple things going on there too, right? Yes, definitely. The consumers anticipating higher prices because they, you know, it's been top of mind. It's in all the headlines, and then you get the social media, news media spins on it, right?

So it's definitely on top of the consumer's mind, but the, the question is for, you know, service providers and manufacturers, are they pulling forward the anticipation of higher prices because of tariffs? Is that what we're seeing right now? Or is it, it's really that raw material prices are going higher, labor costs are going higher, these, these types of things that are gonna be sustainable.

And I think what we heard from the Fed from Fed Chair Powell last week in his conference post the, uh, March, uh, FOMC meeting is we heard that, you know, he brought back the word transitory, right?

[00:03:11] Chris Versace: No, stop it. Stop it

[00:03:12] Lindsey Bell: With regards to inflation. But in, in fair, in all fairness, if inflation is going to be driven by tariffs, it is something, you know, a bit of noise when he's looking through the, for the signal through the noise. It's a little bit of noise because, you know, once you, you put the tariff on, on, it's a one time increase. You see that throughout the next 12 months show up, and then once you lap it, like this happened with washing, washing machine prices in 2018. Right. Prices jumped up immediately, but once you got a, a year into it, then it was, you know, a muted impact. Um, so I think it's, it's something that, you know, inflation is going to need to be watched. But to your point, does it matter? I don't think people are going to, you know, the market's gonna move, move in a significant way on Friday in reaction to inflation, because I think people expect, first of all, the PCE is gonna be a little bit warmer than what we saw from CPI and PPI, which moderated slightly in the month of February. And there's just a significant uncertainty about where inflation goes from here. So I agree. I don't think it's gonna be, uh, it might not matter this month, but it's going to matter in the months ahead what you think?

[00:04:20] Chris Versace: I, that, that I agree with.

But let, let, let me, um. One thing that stood out in the flash PMI data that I referenced was that, um, one of the big input costs was yes, raw material prices. But wages. So, you know, Powell last week said, oh, the employment market's not a big source of inflation. And we might beg to differ they are Mr. Fed, Mr.

Fed chair. And I think it's something that we're gonna have to continue to watch. But you know, at the end of it, Lindsey, I think as we look forward over the next couple days, we'll have a much better sense about inflation and inflation pressures depending on what happens with tariffs.

[00:05:00] Lindsey Bell: Yeah. And the consumer, you know, I just wanna tie off one point.

The consumer's expecting one thing. They're definitely worried, but markets are expecting another thing, the other thing you can do is look at, uh, the bond market. And I recently called this out one of my LinkedIn posts is if you look at the break even rates on the 10 year or the five year TIPS, which is a Treasury Inflation Protected Security, the expectations for inflation have actually come down since January.

Um, and this is like a daily data point, right? Based off of bond markets. So it's gonna be interesting to see which way inflation does break. Um, and so it's really, and the answer really is to know, is to know what happens with tariffs. Right?

[00:05:40] Chris Versace: Right. 100%. I mean, you know, we saw a nice pop in the market on word that Trump's April reciprocal tariffs may not be as bad as feared, right? He's kind of softening his position. I, I have to wonder is this, you know, typical Trump, you know, a lot of bluster and then the, you know, the size of his stick gets a little smaller as we get closer and he winds up, you know, yeah, it wasn't as much as, you know, you feared and it's still a win.

Let me tell you why it's so great, blah, blah, blah. So I, I'm, I'm kind of wondering if we get, um, you know, smaller scaled reciprocal tariffs either in, uh, the number of items the countries or the size of the tariff. But I also think that because, you know, you are seeing trade representatives from the European Union, India, make their way to Washington, uh, early next week, that I wouldn't put it past him to announce some type of trade deals and smaller tariffs, you know.

It's a win for America, Lindsey.

[00:06:47] Lindsey Bell: Yeah. I mean he came out of the gate, you know, when he was inaugurated, like in at the beginning of February. Mm-hmm. He was very hard line with tariffs with China, Mexico, and Canada. And I think now he's seen the reaction to the market. I know that he's saying in Trump 2.0, the market doesn't matter.

[00:07:06] Chris Versace: Right, right, right.

[00:07:07] Lindsey Bell: We're gonna take some short term pain for longer term gain. I also think it set a, sent a signal to other trade partners that if we're willing to be this hard on, you know, our, our allies and our neighbors, um, at least from a Canada, Mexico perspective, you know, we're serious about figuring out this trade thing that we've got going on. And so I think that that gives them reason to come and have these conversations. And I do think that Trump, you know, we talked with, um, with Arthur Laffer not that many weeks ago. And he, he made the point of, you know, at that point in time, we were like, in the weeds of it, it did not feel good, right? And the expectation was like, the world is gonna end because these tariffs are higher, they're broader, and they're happening more swiftly than we've ever experienced except maybe during the Great Depression. Right. Uh, or the thirties I should say. Um, and so I think that like, that expectation has subsided a little bit with some of these news headlines that Trump could be a little easier, even from, from the horse's mouth.

You know, there might be some, some deals to be made with Europe, some of reciprocal in, in the reciprocal trade conversation. So, um, so I think that the market is, is digesting this a little better. That doesn't mean things can't go a wire next. April 2nd, the big day, right?

[00:08:25] Chris Versace: No, I mean, you know, there's a, I always go back to The Art of the Deal, you know, and when you kind of think about that, it, it's clear that, you know, he likes being bold, assertive, unpredictable, because it helps, you know, it keeps his opponents off balance and it gives him the upper hand.

So am, am I surprised that he has sent mixed messages over the last couple days? Not at all, and I, I think he. I would like to think, right, that he has a very good idea of what he's doing and he's playing these games right up until the last minute, you know, the brink. And then we'll see what happens. So like, like I said, I wouldn't be surprised if we get some type of hybrid, you know, quote unquote Trump win as he likes to say.

Um. If we get that, then I think that the market has room to move further higher, re re continue to rebound. But then we, we do have some stiff resistance. You know, the, the 50 day moving average, the 100 day moving average of the S&P 500 are, are pretty tight. And that that could be a, you know, a nice, uh, wall of resistance that we need another catalyst to get over.

But Lindsey, if he doesn't deliver that, then what?

[00:09:43] Lindsey Bell: Yeah. If he doesn't deliver that, then it's, it's, we're going south again. Right? Yeah. I mean, this whole market, this whole economy really does hinge on tariffs at this point in time. You know me, I'm a glass half full type of gal, and I'm trying to always be optimistic and look for the positives in, in every data point, right?

[00:10:01] Chris Versace: Mm-hmm. Mm-hmm.

[00:10:03] Lindsey Bell: And so

[00:10:04] Chris Versace: I'm, I'm sipping, I'm sipping from that half glass full right now.

[00:10:08] Lindsey Bell: So I see a lot of positives in the fundamentals. I see a stable economy right now, but if we get tariffs that are deeper and broader than we had anticipated, that's gonna have a negative impact.

[00:10:22] Chris Versace: I agree.

[00:10:22] Lindsey Bell: You know, I, I, and so it's really hard to plan for the future, and I think that's, that's why you've seen the volatility in the markets.

[00:10:27] Chris Versace: Well. Think of what you just said. Very hard to plan for the future, right? We're, I know we're gonna talk about the consumer in a few minutes. You know, we know that business uncertainty is at or near record levels. So if Trump doesn't deliver something positive, right? Lower tariffs, trade deals. If he doesn't deliver that, and we go forward with tariffs, that uncertainty is gonna go, you know, even higher. And then I have to think Lindsey, and I've been talking about this for a little bit. I think we talked about it last week, but June quarter guidance. How could it possibly be as strong as the market expects if we're rolling in with more tariffs?

I just don't see it.

[00:11:09] Lindsey Bell: Yeah, and I think, you know, we have talked about how those numbers have come down a little bit. So there is, there's a little bit of conservatism being baked in, but it's not expecting anything dramatic. And what I will say, the only thing I will say about that's, that's positive here about tariffs is that it has created this re-rating in the market.

So the market multiple is at about 20 times now. Where it was getting 22, 23, getting up to.com bubble levels, okay, before all this tariff, um, back and forth started. Um, so that's, that's a multiple, that's more in line with, say the 10 year average of 19 times. Mm-hmm. Much lower. Mm-hmm. It's still much higher than the long-term average of about 16 times.

So you've got the valuation being brought in and coming back to reality, which has been good. And it's, you know, a lot of gas has been taken out of the tank of some of these, these tech stocks. But the second thing I would say about tariffs is, is monetary policy. I feel like this thought came to me last week when I was thinking about the Fed, is that, has monetary policy been put into perspective?

Has it been put into perspective because of tariffs? Because monetary policy has juiced the markets. You know, uh, printer go brrr, right? Yeah. Yeah. Whole name. And so people have, have turned to monetary policy to be a support for the market when it's really supposed to be a support for the economy. It's, it's supposed to ensure stable prices.

Mm-hmm. And full employment. Mm-hmm. Right. And so it's almost like, I think the market's finally remembering that, and starting to get the message that higher for longer isn't such a bad thing if economic growth is continuing.

[00:12:45] Chris Versace: Well, yeah, exactly. Why is it higher for longer is the question you have to ask.

It's because the economy doesn't need the paddles of support by lower interest rates. That's, that's a good thing. Um, but what did you make, Lindsey, of Atlanta Fed President Raphael Bostic coming out and saying, Hey folks. I only see one rate cut now in 2025, and we are just coming off the Fed's Updated set of projections last week that said two.

[00:13:13] Lindsey Bell: Yeah, I mean, look, let's be real. It's predicting where interest rates are gonna be at on December 31st, is it's hard in any year. But especially in a year like this with the uncertainty of tariffs and what it means for inflation and employment and all those things. And so I think it's hard to say. Um, you know me, I've been in the camp like you, that there'll be less rate cuts.

That rather than more rate cuts for this year. And I still expect that primarily because inflation has remained above the 2% target across all metrics. And so to me, I'm not surprised to hear that. Um, and I honestly, again, I think that the market is, is not. You know, the market's at two to three cuts this year, and that can change quickly too, the Fed's expectations, the market's expectations.

This all can change very quickly. It's, it doesn't mean it's gonna be smooth and easy, but,

[00:14:07] Chris Versace: um, I suspect less than two. I will timestamp that to today's podcast. Uh, the Wild Card, just, just to bring it back to what we were talking about before, Lindsey, it's gonna be tariffs if we don't get those tariffs.

Then maybe we do see some cuts. If we get tariffs, I just don't see how it's gonna happen.

[00:14:27] Lindsey Bell: Well, let's tariffs, get. That's a great segue again into our final topic is the consumer. Okay. Tariffs have been weighing heavily. We started talking about it on the mind of the consumer. Right. And what we've seen mm-hmm.

In these consumer sentiment. We got the conference board this week. At the end of the week we get Michigan and what we've seen is tariffs weighing heavily on the minds of consumers. It's, it's driving a significant amount of pessimism in these surveys, and it's also leading to higher expectations for inflation down the road.

How do you see the state of the consumer? What's your, what's your vibe, your feel of the consumer?

[00:15:01] Chris Versace: Well, I'm gonna date myself a little bit. Um, did you ever see Rocky three Lindsey?

[00:15:08] Lindsey Bell: Uh, probably not the third one, no.

[00:15:09] Chris Versace: Probably not the third one. So there's a scene in there where Mr. T as "Clubber" Lang is asked for his prediction when he has a rematch with Rocky Balboa.

Right? Every, every kid my age, like, you know. Edge of your seat seeing this, seeing this massive battle between these two on the screen. And uh, Mr. T goes my prediction. My prediction is pain. So, you know, I'm a little concerned about the consumer because, you know, we're, we're coming off and we've talked about, you know, some recent waves of consumer activity being softer.

The number of retailers that have issued softer than expected guidance. You know, we take a look at some of the survey data. Um, you know, consumers are not really feeling all that good. They're concerned about inflation, they're concerned about a recession. You know, we tend to potentially have a mix of a self-fulfilling prophecy.

Right. They're seeing layoffs. Mm-hmm. Right. So they, they get worried when that happens, they tend to retrench. But that's all kind of touchy feely, squishy kind of things. Right. What stands out to me then is something I read, uh, this morning in getting prepared for our conversation, and this comes from Synchrony Financial, and you're gonna say, some folks will be listening, being like, who is Synchrony? So they have issued about a hundred million, uh, credit card accounts across, you know, various retailers and merchants. So I would say that they have a pretty good pulse on what is happening in terms of consumer spending. So, um, the Chief Credit Officer, Max Axler, who. What parent Max Axler.

Oh my goodness. I feel sorry for Max. Anyway, uh, he said that purchase volumes have gone down across the industry as consumers, across all income groups become more thoughtful about spending. So that to me says that consumers are tightening their belt, they are retrenching in their spending. Maybe good for Costco if they're concerned about inflation.

BJ's, something like that, Amazon, but by and large, not good for the economy.

[00:17:15] Lindsey Bell: Yeah. And you know what, it's funny though, what I would say to that is it's like there's all this contrasting data points out there across the economy. And like for that, for example, you heard Brian Moynihan just, I think it was last week talked about how the economy wasn't, I don't know the exact quote, I don't have it in front of me, but it's something about the economy isn't as bad as people think and the consumer is hanging on there. Um. And again, I, I think that there's differences between income groups. Yes. Um, for certain, no doubt about it.

Um, I look at the retail sales number, it was up 3.1% in February, which is by the way, below its historical average of 4.6%. Um, but what I would say is you don't want that number above the historical average because the only times that it's been above the historical average, not the only times, but the majority of the time that it has been, has been

in like exuberant periods, right? So leading into the financial crisis, leading into the.com bubble, and then you get, you also exceed above there, like in, in 2021 to 2023 when it was a massive bounce back after a massive decline in, in retail spending because of, of pandemic lockdowns. Um, so what we, we, we have seen in the past is that consumer sentiment.

Has at times been correlated with consumer spending. But what's more correlated and more accurate is wage growth to consumer spending.

[00:18:37] Chris Versace: Oh yeah, yeah, yeah.

[00:18:38] Lindsey Bell: And right now, wage growth remains solid. It remains, we're seeing actual real wage growth, so wage growth above inflation, which is why you called out earlier, the potential for wage growth to impact inflation.

Um, so I think that, uh, that. We, it's gonna be like, let's it we're in wait and see mode. The consumer is certainly nervous. They're certainly making choices. Um, but companies are still higher and wages are still rising. Um, job openings still exist. Granted, I would say my rebuttal to that would also be because I worry about the consumer too, is that the hiring rate is really very low. It's at levels that's usually equivalent to much higher unemployment rates. Wage growth you're seeing as in an aggregate number when you look though at the middle, that that's been very stagnant for the middle income earners. Um, and the low end has been seeing the raises. But it's not helping them with cost of living.

So

[00:19:35] Chris Versace: did, did

[00:19:36] Lindsey Bell: you know, so there's, again, it's mixed data. Right on. But go ahead

[00:19:39] Chris Versace: on, sorry. On, on that point though, about the lower end and the, even the middle tier consumer, um, there's some data out recently that, and I, I always am shocked to see these figures, but it's like 64% of consumers live paycheck to paycheck.

And I think about the inflation concerns. I think about, you know, like what we saw with the, um, February Challenger job cuts report, you know, popping higher. I, I think it's understandable that folks are gonna just take a more conservative approach to their spending because of so much uncertainty.

[00:20:16] Lindsey Bell: No, and I think that's a fair point and I, I think it's why you're seeing inflation expectations spike so dramatically over the last couple months from the consumer and these consumer surveys.

Um, and it, it's just this consumer is very like, price sensitive at this point in time. So, so I think companies have something if tariff, these tariffs do go through. Companies have a choice. You know, we've historically seen these, these price increases passed on to the consumer. It was, it happened during the pandemic.

 It happened over many points in time. But that doesn't have to be the answer. It could be that, um, the companies themselves eat some of that price increase. They, they push it on their suppliers, things like that. Of course, I think it's some degree of it is gonna be passed onto the consumer.

Um, but we shall see. I

[00:21:02] Chris Versace: love it when you set me up, Lindsey, because, that leads me to say that one of the most important line items when companies report and give their guidance, yeah, we'll be concerned about the top line, the bottom line. Margins. Margins are going to be key as they grapple with rising prices, rising inputs and what they can do on pricing.

So that's, that's what I'll be watching. I was gonna save it for the wrap up, but you just teed me up.

[00:21:32] Lindsey Bell: Well, I think that's gonna wrap up this section. Uh, that was a really good, you know, way to tie the whole conversation up between, between inflation, tariffs, and the consumer. Um, we'll leave it there. We're gonna take a quick little break and we will be right back. 

 Welcome back everybody. Chris, we had a really robust conversation there about all the important things that are driving markets today. Um, what, what stood out to you? Well, did I, did I leave any gems? I.

[00:22:03] Chris Versace: Out there for you? Well, you, you know what? Everything you say is so well thought out, and it just falls into place that I, it's so hard for me to pick out any, any one, Lindsey.

I, I, I, I can't handle that kind of pressure. But, you know, it had me thinking though, or the, the course of, of the conversation about something that Art Laffer said when we spoke with him a couple weeks back and he goes, if you remember this, he goes. What if it all goes right? Everybody is so worried about what could go wrong and, and that really sat with me for the last couple weeks and I, I think about our conversation about, you know, tariffs being potentially smaller, maybe some trade deals.

Okay, that would be good. But if we get that, then maybe the inflation expectations have to come down. Maybe consumers start feeling a little better, you know, perhaps. Perhaps if it all goes right, the economy could pick up, the market could pick up, and we can have a better second, A second half of the year.

[00:23:05] Lindsey Bell: Yeah, and I think though, I think part of that is being priced into the market now. Uh, what we've seen over the last several trading days or maybe almost a week now, um, the market has definitely, um, calmed down a little bit. And so I think that, you know, with the headlines that there might be some deals with Europe or whatnot.

Um, some of it's being priced in, but that not all of it, like I said, the multiples come down. Yep. Significantly. Um, if margin expansion continues, like you said, let's watch margin expansion, um, and if the consumer's optimism picks up, we we're living in a whole different world, aren't we?

[00:23:40] Chris Versace: 100% Lindsey.

[00:23:43] Lindsey Bell: All right, well there's lots to watch going forward.

Um, that was a really great conversation. We talked a lot, a lot. Um, we covered a lot of different things moving markets right now. Um, but that'll be a wrap. You can find Chris over the Street Pro Portfolio, and you can find me at Clearnomics.com, or both of us on LinkedIn. So thanks for listening, and we will catch you next week.