Investors Seem To Be In The Dark

Tariffs have not only confused investors, but now the Fed seems to be puzzled. It's not like we have anything to go by from past experience - or do we?

This week's musings is inspired by the 1984 hit song, "Dancing In The Dark." Here’s some trivia about the song:

• Springsteen wrote this song about his difficulty writing a hit single to please fans and record executives. In the lyrics of the song he refers to himself as "a hired gun dying for some action." He also refers to struggling artists with the lyrics "I'm just about starving tonight."

• Springsteen's manager, Jon Landau, demanded a hit for the album "Born In The U.S.A." He wanted a "guaranteed" hit for the album. "Dancing In The Dark" provided that spark as the first song released from the album, but other songs such as the title song of the album, "Glory Days," "I'm on Fire," and "My Hometown" were also commercially successful songs.

• The music video for the song was wildly popular as well. Director Brian DePalma filmed the video at one of Springsteen's concerts. Courtney Cox, of "Friends" fame, was planted in the audience and it was scripted that Springsteen would select her to come up on stage.

• This song won Springsteen his first Grammy in 1985 for "Best Male Vocal." It would be the first of 20 Grammy's awarded to the singer.

"You can't start a fire

You can't start a fire without a spark

This gun's for hire

Even if we're just dancin' in the dark

Stay on the streets of this town

And they'll be carvin' you up alright

They say you gotta stay hungry

Hey baby, I'm just about starvin' tonight

I'm dyin' for some action

I'm sick of sittin' 'round here tryin' to write this book

I need a love reaction

Come on now, baby, gimme just one look"

Here's what we've seen so far this week..

Dancin' In The Dark. Most of the focus this week has been on the Fed, interest rates, and remarks from Chairman Powell. Overall, markets seem to have gotten the response it wanted as equities have a chance to end positive for the week for the first time since February 10th. However, tariffs seem to have confused everyone, from investors to the Fed.

In fact, the Fed publishes 3 different projections of GDP for the coming quarter done by three different districts - St. Louis, Atlanta, & New York. The Atlanta Fed GDPNow typically gets a lot of attention and has been published since 2011. However, in late February, the projection turned negative. Why? Turns out the model has incorrectly accounted for shipments of Gold to the U.S. (which will not be reflected in the actual GDP print). That is making the "Net Exports" component of the model negative, which, in turn, is making the projection negative. Coincidentally, the NY and St. Louis GDP forecasts show +2.7% and +2.3%, respectively for Q1. Time will tell who is correct.

In terms of fears over tariffs, we submitted a couple of weeks ago evidence that tariffs employed by Trump the first time in 2017-18 didn't derail the economy. In addition, the U.S. is the LEAST restrictive country among the G20 with regard to trade barriers. On top of that, the U.S. has the 3rd lowest tariff rates among the G20. The equalization of tariffs among these (and other countries) and the U.S. is a good thing that brings trade balance.

Meanwhile, we've seen a pick-up in both Industrial and Manufacturing Production over the past few months. Since the beginning of the year, Industrial Production has risen in January (+1.0%), February (+0.3%), and March (+0.7%). Manufacturing Production has followed suit, +0.5%, +0.1%, & +0.9% over the same time period. Prior to the past 3 recessions, U.S. industrial & manufacturing production was either negative or declining.

Fire With A Spark? Additional comments made by Chairman Powell do not seem to match up with current or historical data. During his press conference on Wednesday, Powell stated, "Inflation has started to move up." This is a puzzling statement as

both CPI and PPI moved lower on a year-over-year basis in February. In fact, the Cleveland Federal Reserve's "Nowcast" of future inflation is showing a 0.2% change in February for the Fed's preferred measure of inflation (PCE) and almost no change for March. With regard to CPI, the Nowcast for March is showing 0% change in inflation. And, the hot button issue of late - the price of eggs - has changed dramatically. The average price of a dozen eggs has plummeted from a little over $8/dozen on March 4th to just over $3/dozen yesterday. So, what is Mr. Powell referring to exactly?

Investors continue to be panicky over tariffs as any whisper from the U.S. administration or an opposing government official, and the market seems to swoon. However, after peaking on March 10th at 27.8, the VIX (volatility index) has dropped back down to its historical average of 19.5. If we look ahead, the market has priced in lower VIX levels going forward. The VIX futures term structure shows a leveling of the index around the historical average into May and June of this year. This could be a sign that the market is settling down from the initial tariff shock.

On the side of the bulls, an end to this current bull cycle would be abnormal, both from a return and length point of view. If the current bull market ended today, it would be the 2nd lowest return for a bull market since 1949. In addition, an end to this bull market would mark the 3rd shortest bull market over the same time period. The best course for investors is to stick their financial plan/investment strategy and ignore the noise about tariffs and inflation.

Bruce & Courtney dancing in 1984...

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