Warnings
Once again there are voices within the investment community warning against an overzealous rebound amongst US asset prices. The rebound in equities following the progress made in resolving liberation day tariffs has been remarkable. Many US indices have entirely recovered the losses made following April 2nd. This stands in stark contrast to other markets, notably fixed income and foreign exchange, where the legacy of tariffs seems to have created a paradigm shift despite the unwinding of most headline tariffs.
What triggered the latest round of warnings was most likely the downgrade of the credit rating on US debt on Friday. Ratings agency Moody’s downgraded its rating from Aaa to Aa1. Moody’s was the last agency that held such a rating meaning that treasury bills have conclusively left the Triple-A club. With Trump’s tax cut bill making progress and the threat of US economic downturn greater than prior, Moody’s downgrade encapsulates the atmosphere of fiscal deterioration.
Despite US stocks opening significantly lower yesterday versus Friday’s close, equity indices managed to reclaim ground during the session. The impact on treasury yields has been longer lived with prices remaining suppressed throughout the curve. The messages coming from investment professionals is likely to remain mixed. Under this environment elevated volatility will also be maintained due to the conflicting forces the market is facing. Tax cuts can be great for equities where those cuts increase consumption and investment by raising disposable income amongst a population. However, couple such cuts with an economic downturn/recession and the outcome changes quickly as fiscal solvency enters the equation.
Discussion and Analysis by Charles Porter
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