What a difference two months make!
On April 8, the Nasdaq had plummeted to bear market territory after touching all-time highs just six weeks earlier, and the S&P 500 was on the cusp of joining it. Small caps were faring even worse. Volatility had spiked to multi-year highs. And everyone was certain a recession, or high inflation – or both – were imminent.
The reason was tariffs. “Liberation Day” a week earlier, in which President Donald Trump had imposed sky-high tariffs on more than 100 U.S. trading partners from all over the world, had sent stocks plummeting as economists clutched their pearls and warned of imminent collapse.
Fast forward to today, just over two months later, and it’s a totally different picture. Tariffs are on 90-day pause. Volatility has all but evaporated, although Israel’s attack on Iran last Thursday did cause it to spike a bit. Inflation is at four-year lows. The economy is doing just fine, with unemployment holding steady and U.S. companies posting a second consecutive quarter of double-digit earnings growth in Q1. And stocks are back near their February highs, having completely recovered their late-March/early-April losses.
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Granted, the coast isn’t totally clear – not by a long shot. Tariffs are on pause, they aren’t dead, despite a federal judge’s best efforts. Stocks have recovered from their April implosion, but they aren’t soaring, with the S&P up just 2% year to date. And consumer and investor skepticism remains. As the 90-day tariff pause deadline looms on July 9 for all but the United Kingdom (the only country with which the Trump administration has struck a tariff deal thus far), I’d expect that skepticism to translate to increased volatility and uncertainty and potentially trigger another modest pullback in stock prices. All bets are off if the tariff deadlines come and go with no deals and no more “pauses.”
Value Stocks Leading the Way Ahead of Tariff Deadlines
But as investors, we have to go with the evidence in front of us, and right now it’s quite good. Stocks across the board are acting well, as the S&P Equal Weight Index has moved in tandem with the S&P, and value stocks have actually outperformed growth, with the Vanguard Value Index Fund (VTV) up nearly 3% year to date. Meanwhile, the stocks in my Cabot Value Investor portfolio have done more than keep pace, with an average YTD gain of 13.5% so far this year. After adding a new undervalued industrial stock to the portfolio earlier this month, we now have a full 10-stock portfolio for the first time since early this year – a byproduct of a strong market. If our portfolio remains full a month from now, it would likely mean that the tariff deadlines have come and gone without incident.
If there’s a lesson to be learned from the past two months, it’s this: tariffs are like bad weather. If you just throw on your poncho and wait it out, there’s likely to be plenty of sunshine once the clouds part. Remember that if clouds start to form again in the coming month.
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