July 7, 2025

QuickTakes

Liberation Day II

Liberation Day I occurred on Wednesday, April 2 after the stock market closed, when President Donald Trump imposed reciprocal tariffs on America's trading partners. The immediate reaction was what we called "Annihilation Days" in the stock and bond markets until April 9, when Liberation Day I was postponed until July 9 (chart). Today, Trump announced reciprocal tariffs again on 14 countries. Their governments have until August 1 to respond before the tariffs are imposed. This time, the initial reactions of the stock and bond markets to Liberation Day II have been relatively muted, so far.

In an April 11 NBC interview, Peter Navarro, a White House trade adviser, claimed that "90 deals in 90 days" was possible. So far, there have been only two trade deals announced, with the United Kingdom and Vietnam. There is also a framework agreement with China.

The worst of Trump's Tariff Turmoil (TTT) might be over, but it ain't over 'til it's over. We still believe that Trump knows that he needs to put an end to his trade war soon before it does any serious economic damage in the US. A recession in coming months probably would cause the Republicans to lose their narrow majorities in both houses of Congress during next year's mid-term elections. That's the story we've been telling since late March, and we are sticking to it.

Global stock investors seem to agree with us. The All Country World MSCI stock price index is at a record high in both US dollars and in local currency (chart).

The same can be said for the Developed World ex-US MSCI stock price index (chart).

The Emerging Markets MSCI stock price index is still below its February 2021 record high, but it has been strong in recent weeks (chart).

The one major casualty of Trump's trade war has been the US dollar (chart). However, Trump probably views that as a positive development since a weaker dollar boosts US exports and depresses US imports. Trump's daily harangues against Fed Chair Jerome Powell seem to be having the same effect, by the way.

Since the start of the year, the US share of the market capitalization of the All Country World MSCI has dropped from 75% to 72% (chart). Most of that market-cap share went into Europe. Trump's huffing and puffing might continue to weigh on the dollar and reduce the US share of global stock markets. However, everyone seems to be bearish on the dollar and bullish on Europe.

We are going to stick with our contrarian position and bet that the dollar will rebound and the world market-cap share of the US MSCI will stabilize. We may change our tune if the US share series falls below its upward trendline that started in 2010.

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