Opportunities amidst historic volatility

Tariff Impact and Economic Outlook

• Tariffs are projected to drive both inflation and growth declines, though the specific magnitude remains undetermined during the current 90-day pause.
  • The primary economic risk is heightened uncertainty rather than immediate structural damage.
  • Growth is expected to experience a sharp but temporary dip followed by a recovery, rather than a prolonged decline.
• Market sentiment reflects a binary risk scenario over the next 6 to 12 months:
  • Bear Case: High tariffs trigger retaliatory measures, leading to a global trade war, recession, and earnings cuts.
  • Bull Case: Successful trade deals, lower tariff barriers, and potential tax cuts later in the year drive markets higher.
  • Josh Schifrin maintains a long-term optimist view, expecting equity markets to settle at higher levels by next year despite volatility.

Market Structure and Rate Dynamics

• The interest rate market moved sharply higher this week, breaking correlations that typically see equities and rates move inversely.
  • The Treasury yield curve steepened, driven specifically by pressure on the long end of the curve.
  • This move is interpreted as a demand for higher term premiums following Chair Powell's hawkish comments regarding tariff-induced inflation.
• Market liquidity showed signs of fragility late Tuesday and early Wednesday, though conditions did not reach the severity of market structure issues observed during the COVID crisis.
• Future yield curve expectations remain tilted toward steepening across various economic scenarios.

Asset Class Trades and Dollar Outlook

• Equities: The recommended trade is to buy meaningful dips, utilizing an iron stomach to navigate the transition period of policy changes.
• U.S. Dollar: Expectation is for the dollar to weaken as the "American exceptionalism" premium erodes amid weaker growth prospects and broad policy shifts.
  • Historical correlations have shifted; the dollar is no longer reliably acting as a hedge against falling risk assets, unlike during the first Trump administration.
• Commodities (Energy): The trade stance is bearish on oil prices.
  • Administration focus on lowering energy costs, potential tariff-induced inflation, and weaker growth collectively act as downward pressure on energy markets.
• Risk Premiums: Markets have priced in significant uncertainty, requiring higher risk premiums for U.S. assets broadly.

Forward-Looking Horizon

• The immediate focus for markets and policymakers is the outcome of the 90-day tariff pause and upcoming events from Washington.
• There is a market-wide hope for a period of calm to break the current high-velocity, frenetic trading environment.