February 21 – Stock futures had a mixed tone overnight, with the Dow Jones Industrial Index following through on yesterday’s selling that was largely a product of increased concerns about consumer buying slowing, while the S&P and the Nasdaq firmed. We’ll get data on consumer sentiment later this morning, but for now, we’re ending the week on a cautious note. Even so, the VIX Is trading near 16 this morning, while the dollar index bounces to trade near 106.6. Yields on 10-year Treasuries are trading near 4.49%, while yields on 2-year Treasuries are trading near 4.26%. Crude oil prices pulled modestly lower overnight. Wheat prices firmed, while corn and soybean prices were modestly lower overnight.
We’re one month into the second Trump Administration, and Wall Street continues its attempts at digesting the steady flow of headlines coming out of Washington, D.C. This administration has likely accomplished more in its first month in office than any other president in the history of this country. Whether that’s good or bad is the subject of debate – both in Washington and on Wall Street. President Trump has certainly proven to be a disruptor. The status quo is no longer accepted. Whether that’s good or bad is initially argued based on whether your political leanings are to the right or to the left. But the final verdict is far from being written yet. President Trump is using legal channels created by President Obama to create the disruption. Those channels can be used for good, and they can be used for harm. Again, your view of which it is this time likely hinges on your political leanings.
I will focus here on the economic impacts. I have frequently focused on the negative impacts of excessive government spending, and the long-term harmful implications for the economy. I increased my spoken concerns during the first Trump Administration, increased them when Covid hit, and maintained that heightened level of concern through the Biden Administration. The negative implications of the popular Modern Monetary Theory are far reaching, and we’re paying the price for it, in my view. MMT thinking has permeated much of Washington on both sides of the political aisle, while also spreading overseas to other major economies. Those negative implications gained momentum in recent years, increasingly raising risks for our economy. That was certainly a contributor to the rare divergence in the yield curve starting six months ago, when yields on 10-year Treasuries rallied more than 100 basis points, during a time when the Federal Reserve was cutting its short-term benchmark rate by 100 basis points.
Tariffs raise the costs of goods entering the country. Tariffs also support domestic industry to replace what’s being imported from overseas. Sometimes that’s at a higher cost to the consumer, while other times it increases domestic efficiencies. Tariffs also bring other nations to the negotiating table to ultimately lower costs. Most of our major trading partners currently already charge us larger tariffs than what we charge them. Wall Street took comfort in Trump’s statements that the intent of his reciprocal tariffs was to bring nations to the table to negotiate the lowering of those tariffs, which should increase trade at lower costs if successful. We have yet to see whether that will happen. If not, it’s inflationary. If so, it lowers costs while increasing demand for U.S. products, stimulating our economy. Cutting large numbers of government workers is expected to increase unemployment. As such, I’ve been monitoring the weekly jobs data, and we’ll certainly be watching the monthly jobs reports as well. Thus far, it has appeared as a mere blip in the data, but we’re still quite early in the process. Sending illegal migrants back home is expected to hurt the workforce, and we’re seeing signs of that in some sectors of the economy. This is another area to watch in the months ahead.
Trump is also disrupting the geopolitical economy. Most notably is his sharp criticism of Ukraine. It’s largely been taboo to speak of Ukraine as anything but a victim of Russian aggression the past three years. His criticism of Ukraine comes as Trump opens conversations with Russian President Vladamir Putin. In reality, this shift likely has more to do with Trump’s desire to contain China than it does an increased trust of Putin. Trump sees China as the ultimate threat to America. Reopening channels of communication with Russia gives Putin an avenue to separate himself again from China, whom he also fears. Putin only aligned himself with China out of necessity during the Ukraine war. End the war, and China may go back to being more of a threat than an ally – at least that’s likely Trump’s objective. All of this has significant implications for global trade and economic growth, or the lack thereof. The debate in Washington will remain heated, because money is power, and that’s being disrupted. The debate on Wall Street will continue until we see whether the economic disruptions result in net positive or negative results. Part of that answer will also come in the larger global disruptions that will impact trade and economic growth. Headlines will continue to drive trade for some time. For now, the VIX is low, and stocks are trading near all-time highs, suggesting that Wall Street continues to hold onto hope that the disruptions will be net positive in the end.
