The Tariff Announcements . What's Discounted, Where Could the S&P 500 Bottom?

Some thoughts from research and current thinking ..

One way to look at "what is discounted" in the stock market from the US tariff announcements yesterday is to realize that the US brought in $80 billion in tariff revenues in 2023 and an estimated $83 billion in 2024. Some analysts believe an increase in tariff revenues to $300 billion was discounted at the March low (SPX down 10.5%).  What was announced yesterday was much bigger than that at $600-700 billion.  By extension, that suggests the S&P 500's total decline could reach 21-25% before a tariff tax of $600-700b is discounted.

Of course, some of the $600-700 billion of tariffs proposed may not occur due to successful negotiations, changes in tariff rates and/or Trump & Co adjusting its policy as the stock market approaches a 20% bear market decline.   On the CON side of the ledger, our trading partners (China, EU) may retaliate causing a trade war of unknown duration and we will likely see higher inflation in the US and an increased probability of recession.  Some economists are already projecting both a global and US recession if all of what was proposed by Trump & Co. plays out. Source: Bloomberg

For reference, using the longer-dated Dow Jones Industrial index, a bear market that coincides with a recession has averaged a 35% decline over 353 trading days (1.4 calendar years).  A bear market not associated with a recession has averaged a 25% decline over 296 days, or 1.2 calendar years.

Net-net:  it seems like a shallow bear market decline of 18-22% would discount a lot of bad news.  This equals 4800-5400 on the S&P 500, down anywhere from 1 to 11% from today’s current price of 5447. 

• Our base case is a decline to 5000-5200  (a 15-19% decline, down another 4-8%, which gets the S&P 500 back to its spring/summer lows of last year and equals a Fibonacci 38.2% retracement of the bull market since Oct 2022). 
• Our lower end expectation is a decline to 4820 (a 21% decline, down another 11% and equal to a 50% retracement of the bull market).

We have implemented additional cash in our strategies, tilted towards more defensive sectors and implemented hedge positions (that go up as the market declines).  We will have to see what our indicators look like as this plays out and we approach the levels mentioned above to fine tune where to reduce current defensiveness and add back equity exposure.

As always, we are available for questions or comments.