March 18, 2025

QuickTakes

‘Liberation Day’ Coming One

Day After April Fools' Day

The stock market rally of the past two days faded today. The S&P 500 fell -1.1%, just shy of correction territory. Even Nvidia fell 4.3%, even though the company announced new chips and a strategic collaboration with GM today. The 10-year US Treasury bond yield has been hovering around 4.30% since late February. The price of gold rose to another record high (chart).

We suspect that the stock market hasn't fully discounted what's coming on April 2, when the US will tag America's trading partners with effective tariff rates equal to the average tariff that each country imposes on the goods it imports (or should import) from the United States plus the US Commerce Department's estimate of the implicit tariff imposed by its nontariff barriers to its markets. The US will impose on each country a reciprocal tariff reflecting this effective tariff rate.

Trump has declared that April 2 is "Liberation Day for America." Stock investors aren't buying it. The S&P 500 has declined into correction territory since February 19 on fears of a tariff war, which may very well be exacerbated by the April 2 round of reciprocal tariffs. So far this year, foreign stock markets mostly have outperformed the S&P 500, the Magnificent-7, and the S&P 493 (chart). Among the best performing stock markets have been those in China and Germany.

The rotation out of US and into foreign stocks suggests that global investors have been mostly selling the Magnificent-7. Rather than buying the S&P 493 (as we’d expected), they've been buying foreign stocks with lower valuation multiples, especially Chinese technology and German industrial stocks (chart). In addition, thanks to Trump Tariff Turmoil 2.0, recession fears are more widespread in the US than in China and Germany, because the latter two are stimulating their economies.

The forward P/E of the US MSCI stock price index still well exceeds those of the other major MSCI stock price indexes (chart).

Meanwhile, February's US industrial production indicator, reported today by the Fed, rose solidly by 0.9% m/m and is approaching previous cyclical highs (chart).

The output of electric and gas utilities spiked to a record high in January and remained just below it in February (chart). That confirms our thesis that bitterly cold winter weather slowed the economy. We expect to see a solid rebound in the spring, confirming our resilient-economy thesis.

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