Highlights for This Week Include:

• While stocks remain volatile, they rallied on Tuesday into Wednesday after Treasury Secretary Bessent’s comments that he expects the trade war with China to de-escalate, which was followed by Trump stating that Chinese tariffs could change. This suggests a fluid situation that is changing rapidly.
• We note that tariffs are a policy decision that can be modified, and these comments suggest the Trump administration is working toward options on tariffs that help the market and economy find a positive path forward from the current uncertainty.
• Meanwhile, an early look at April’s business surveys suggest that tariff uncertainty is slowing economic activity, but the surveys remain consistent with positive economic growth.
• In addition, deregulation and the promise of low taxes are also in the works that offer economic tailwinds.
• We continue to recommend that investors stay focused on their long-term investment plans, where stocks play a key role in maintaining a well-diversified portfolio’s purchasing power.

An Update on Tariff Uncertainty

While stocks remain volatile due to government policy uncertainty, they rallied on Tuesday into Wednesday after Treasury Secretary Bessent’s comments that he expects the trade war with China to de-escalate and believes a deal can be reached. After the market closed, President Trump told reporters that 145% tariffs on China are “very high” and that could change and backed away from comments regarding Fed Chairman Powell. We note that tariffs are a policy decision that can be modified, and these comments suggest the Trump administration is working toward options on tariffs that help the market and economy find a positive path forward from the current uncertainty.

While concluding trade deals on a tight timeline is difficult, many options are available, including further delaying reciprocal tariff pauses based on progress in negotiations. Providing more exemptions is also an option to address areas of highest concern, like autos. As of this writing, stocks were rallying again on Wednesday, with the Trump administration signaling that it is considering slashing tariffs on Chinese imports to de-escalate trade tensions.

Economic Readings Consistent with Slower but Still Positive Economic Growth

The S&P Global Flash US PMI is a preliminary business survey (includes about 85% of respondents) that provides an early look at a given month’s private sector economic activity. The April reading is particularly important since the responses were collected after Trump’s April 2nd tariff announcement that shook financial markets.

The survey showed output rose in April at its slowest pace since December 2023, consistent with the U.S. economy growing at a modest annualized rate of just 1.0%. It showed manufacturing broadly stagnating as any beneficial effect of tariffs are offset by heightened economic uncertainty, supply chain concerns, and falling exports. It also showed the service economy is slowing amid weakened demand growth, notably in terms of exports such as travel and tourism. Manufacturers’ and service providers’ confidence about business conditions in the year ahead has deteriorated, due to growing concerns about the impact of recent government policy announcements.

However, it’s important to note that the survey remains consistent with further economic growth and that uncertainty is driven by trade policy that can be modified or reversed, and that trade discussions are ongoing that could ultimately result in trade deals that would reduce uncertainty.

Market Dynamics Support a Cautious Outlook for Stocks

While stocks continue to digest the considerable uncertainty generated by tariffs, they rallied on Tuesday, driven by positive rhetoric on trade deals, particularly with China. Stocks also benefitted from President Trump stating that he doesn’t intend to fire Federal Reserve Chairman Powell. Market breadth was impressive and was accompanied by a decline in the 10-year Treasury and a rebound in the U.S. dollar. The rally continued Wednesday with further signs of de-escalation in the trade war with China.

All of this reflects a fluid situation, and for now, we advise a cautious stance toward risk assets. We are seeing downward revisions to the economic and earnings outlook for this year, while defensive sectors are outperforming cyclical sectors. The defensive Consumer Staples, Health Care, and Utilities sectors are outperforming the cyclical Consumer Discretionary and Technology sectors. In addition, corporate bonds are beginning to price in a higher probability of future defaults, which is consistent with economic weakness.

Importantly, we emphasize that stocks remain a critical part of a well-diversified portfolio and are key to maintaining portfolio purchasing power. We note that corrections are common, even during bull markets, with the average year seeing a 14% correction while ultimately returning a positive 10%. We continue to recommend that investors stick with their long-term investment plans.