Market Analysis: April 26th - Trade Policy, Monetary Policy, and Stock Market Outlook

Executive Summary

The overall market sentiment appears cautiously optimistic in the short term but with significant underlying concerns for the medium to long term. Recent policy clarifications and potential trade compromises have triggered a relief rally, but fundamental economic challenges remain unresolved. The outlook for tech stocks is mixed to negative, with factors like potential tariff impacts, lower corporate margins, and signs of weakening discretionary spending presenting headwinds.

Recent Market Performance

• S&P 500 experienced a strong rally despite remaining below the 50-day moving average
• Bond market showed improvement with 10-year yields dropping to approximately 4.2%
• Gold prices declined slightly
• Overall market movement suggests a mean reversion trade in response to anticipated policy changes

This price action reflects market relief following clarifications on monetary policy and potential moderation of the most extreme tariff proposals.

Monetary Policy Outlook

Powell's Position Secure (For Now)

Former President Trump walked back statements about potentially firing Federal Reserve Chair Jerome Powell:

"I have no intention of firing him. Never did. The press runs away with things."

Treasury Secretary Scott Bessant and Commerce Secretary Howard Ludnik reportedly advised against removing Powell, with the President apparently accepting this counsel. However, Powell's term expires next May, creating uncertainty for 2025.

Fed's Stance on Rate Cuts

Governor Waller delivered a notable speech on tariffs and monetary policy that was surprisingly dovish:

"I'm willing to look through whatever tariff price effects there are... I'm not going to overreact to any increase in inflation that I think is attributable to the tariffs. But if I see a significant drop in the labor market... we would have to start [cutting rates]."

The markets are currently pricing in a small chance of a rate cut in May, with a more significant probability for June. Actual rate decisions will depend heavily on upcoming economic data.

Labor Market Conditions

Despite anecdotal reports of layoffs (such as Intel reducing its workforce by 20%), weekly unemployment claims data shows no significant deterioration in the labor market. The upcoming non-farm payrolls report will be closely watched for signs of slowing job growth or rising unemployment.

Trade Policy Developments

Tariff Implementation Status

Following "Liberation Day" announcements, the administration has:

• Maintained very high tariffs on China (approximately 145%)
• Paused tariffs on the rest of the world for 90 days to allow for negotiations

This partial pullback has calmed markets somewhat and triggered intensive trade negotiations with various countries.

Potential China Tariff Moderation

Significant market optimism emerged from reports that Secretary Bessant indicated the high China tariffs were "unsustainable." Trump subsequently suggested a potential compromise:

• Tariffs might be reduced from 145% to approximately 50%
• While still much higher than pre-announcement levels, this moderation has been welcomed by markets

Trade Negotiations Philosophy

Secretary Bessant outlined his vision for an ideal trade agreement:

"There is an opportunity for a big deal here... if China is serious on less dependence on export-led manufacturing growth and a rebalancing toward a domestic economy... let's do it together. This is an incredible opportunity."

However, confusion exists regarding the actual status of negotiations. Trump claims regular discussions with China, while the Chinese embassy denies any substantive talks are occurring.

Economic Impact of Tariffs

Supply Chain Disruptions

Early evidence shows significant declines in container shipments from China to the US. These logistics shifts will likely impact retail availability by June or July, potentially creating supply disruptions similar to (though less severe than) COVID-era shortages.

Price Impact and Corporate Margins

The distribution of tariff costs appears to be falling primarily on US importers:

• Governor Waller suggested costs might be shared roughly equally between suppliers, importers, and consumers
• Bloomberg's chief economist Anna Wong sees importers absorbing most costs through margin compression rather than passing them to consumers
• Walmart indicated a strategy of sacrificing profits to maintain market share rather than raising prices
• Homebuilders like Pulte project approximately 1% price increases due to tariffs

Consumer Discretionary Weakness

Early earnings reports suggest tariff uncertainty and market volatility are already impacting discretionary spending:

• Travel and airline bookings show signs of weakness
• Consumers appear to be becoming more cautious with non-essential purchases

Stock Market Outlook

Short-Term Factors (Positive)

• Relief rally from policy clarifications
• Potential moderation of extreme tariff proposals
• Fed's willingness to cut rates if labor market deteriorates
• Corporate ability to absorb some margin pressure

Medium/Long-Term Concerns (Negative)

• Fundamental trade issues remain unresolved
• Supply chain disruptions likely to worsen in coming months
• Uncertainty about Fed leadership beyond May 2025
• Early signs of weakening consumer discretionary spending
• Tech sector particularly vulnerable to supply chain disruptions and margin compression

The current rally appears to be a relief response rather than a fundamental shift in market conditions. The analyst suggests "the lows in the market are not yet in," indicating further volatility ahead, particularly for technology stocks which face both demand challenges and supply chain disruptions.