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WEEK AHEAD
March 17-21, 2025
Our trend following technical signals was mixed for the week. Moving averages were softened again from the short-term selling pressure but offset by the better-than-expected inflation print for the economic fundamentals. Our tactical position cautiously remains in the fully allocated position for the time being.
Wall Street's rollercoaster continued its stomach-churning ride as the S&P 500 opened the week down and staged a dramatic 2.15% rally last Friday—not enough to prevent sliding 2.23% for the week. The culprit? Tariff-induced selling pressure spilled over like a bad sequel to Monday's market horror show.
Among the Magnificent Seven, Meta stands alone in the green, proving that in times of tariff-driven turbulence, at least one tech giant can hold onto its gains. Meanwhile, investors seeking shelter from the storm flocked to safety - Consumer Staples, Healthcare, and Utilities - because when the economy sneezes, people still need toilet paper, doctors, and electricity. But the real MVP of market jitters? Gold, up over 14% YTD (Sowell MPD Series maintains a strategic allocation to real assets for diversification.)
Meanwhile, small-cap stocks, as tracked by the Russell 2000, are enduring their own crash course—down 8.11% YTD. In uncertain times, the market is passing on the kiddie rides in favor of the big, bumpy roller coasters.
Despite the return of recession doom-and-gloom headlines, the data stubbornly refuses to play along. The latest inflation readout handed the Fed a glimmer of hope ahead of its next meeting:
On the economic front, it's a "bad news is good news" situation for the Fed's rate-cut calculus:
Of course, this week's real showstopper isn't Trump's latest tariff tactics—it's the Fed's interest rate decision and forward guidance. This is also an important week of key economic indicators leading into the FOMC meeting this Wednesday: Business Inventories, Industrial Production, and Housing Starts, to name a few. Will economic fundamentals and the Fed be enough to calm the markets? Through all this chaos, let's not lose sight of the age-old wisdom: buy low, sell high.
"A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. And most certainly, fear is now widespread, gripping even seasoned investors."
– Warren Buffett, New York Times Op-Ed "Buy American. I Am." – October 18, 2018
Tariffs & Trade: Will They Really Make a Difference in 2025?
Since the beginning of the year, markets have corrected from all-time highs, and many in the media attribute this to the uncertainty surrounding the Trump administration's tariff discussions. However, it's important to remember that market corrections of around 10% occur almost every year. Given historical market volatility, the average annual correction typically falls between 7-10%, regardless of external factors.
In 2025, a correction would not be surprising, especially considering the S&P 500 posted strong returns of over 20% in 2019, 2021, 2023, and 2024. As of the end of 2024, the five-year average annual return for the index stood at a solid 14.5%. Thus, the current downturn could be a reflection of normal market fluctuations.
Understanding Tariffs
Tariffs are taxes on imported goods. They have been a part of American economic policy since the nation's founding, originally serving as a primary source of government revenue. Beyond revenue generation, tariffs have historically been used to protect domestic industries, promote economic growth, or penalize unfair trade practices – the same approach our counterparts took. This strategy, known as mercantilism, has been a key tool for global economic powers throughout history, as they sought to maximize exports while minimizing imports.
The Shift in Trade Policy
For a century—from 1870 to 1970—the United States maintained a trade surplus. However, since 1970, the country has consistently run a trade deficit, which today amounts to approximately $130 billion, including goods and services. Several factors have contributed to this shift:
Comparative advantage is the idea that countries should specialize in producing goods and services they can produce most efficiently, thereby fostering mutual economic benefits. In theory, this should lead to greater global output and consumption.
However, real-world trade dynamics are far more complex. National security concerns, strategic interests, political factors, and even national pride influence trade policies. Additionally, countries focusing solely on low-value economic activities often lack the resources to invest in advanced technology and defense industries.
Tariffs Today: An Uneven Playing Field
Unlike many of its global counterparts, the United States has largely moved away from mercantilist policies, allowing its industries to compete with minimal government intervention. In contrast, other countries actively use tariffs, subsidies, and regulatory measures to support their domestic industries. This has led to a significant shift in manufacturing away from the U.S.
A prime example of this imbalance can be seen in the automobile industry. The U.S. imposes a 2.5% tariff on European car imports, whereas the European Union levies a 10% tariff on U.S. car imports. This disparity has put American manufacturers at a disadvantage over time, contributing to the decline of various industries. Semiconductors and solar panels are notable examples of sectors suffering from foreign government intervention and domestic policy shifts.
The reality is that nearly every country uses tariffs to bolster its own economic success—often at the expense of U.S. industries. But to put things into perspective, even current tariffs might be able to raise $100 billion in annual revenues compared with individual income taxes raising $2.5 trillion and Social Security and Medicare taxes raising $1.7 trillion. The reality is tariff talk is more bark than bite compared to today's overall U.S. tax policy. The expiration of the first Trump tax cuts of 2017 will have far more impact on the economy than any new tariffs. As trade policies evolve, the question remains: Should the U.S. return to a more mercantilist stance to safeguard its economic future and level the global economic playing field? Trump thinks so…
Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.