Wentz Weekly: Tariff Threats

Wentz Weekly Insights
Stocks Higher Again Despite Latest Tariff Threats

Even though it was a holiday shortened week and a half day Friday, the upward momentum in stocks continued with stocks capping of the week with a 1.06% gain. In fact, the month of November was quite strong, the best month in a year as the S&P 500 gained 5.7% while the Dow rose 7.5%, Nasdaq rose 6.2%, and the small cap Russell 2000 index outperformed with a 10.8% increase. Small caps have been the best performing part of the market since the election, due to hopes of deregulation and what is perceived as a more business friendly Washington.

While volatility in the stocks market has subsided in recent days, that was not the case for fixed income markets the past week. Treasury yields fell substantially, mostly the beginning of the week after Trump announced Scott Bessent as nominee for Treasury Secretary. Bessent, a Wall Street veteran and hedge fund manager, is seen as less aggressive on tariffs and more market friendly with a priority on extending the 2017 tax cuts. Treasury yields fell over 20 basis points across the curve last week.

The big headline though was Trump saying on the Truth Social app that one of his first executive orders would be to impose a 25% tariff on all imports from Canada and Mexico for their roles in facilitating illegal immigration as well as the flow of illegal drugs into the United States, along with a 10% tariff on all Chinese imports due to its connection with illegal drugs.

The threat of new tariffs raises two concerns – reigniting inflationary pressures and risks of a broader trade war. Some economists believe the implementation of tariffs would just raise the prices of goods across the economy, some estimates as high as one or two percent, and have an impact on economic growth. Under the last Trump administration, recall the US and China were involved in a so called trade war that rattled markets and creating heightened volatility, until an agreement was finally made where China was to import a certain amount of US goods over a period of time.

There was a slight impact on markets over the tariff threat Tuesday and Wednesday, but investors came back on the half day Friday sending stocks higher. It was becoming a common thought that the threat was to be used as a negotiating tactic and not necessarily a policy tool of the Trump team.

Investors face a busier week in the week ahead with the main focus jobs data that begins to roll in Tuesday with job openings, followed by ADP’s payroll data Wednesday, jobless claims Thursday and the employment report Friday. Current consensus estimates 200,000 jobs were added in November after a weak October, with worker strikes and hurricanes taking the blame. Also, there will be plenty of Fed speak and a discussion with Chairman Powell on Wednesday before the Fed goes into a blackout period next week ahead of its next FOMC meeting December 18th.

Week in Review:

Stocks had another positive week up most of the week with only a small decline Wednesday over tariff concerns which dominated the headlines after Tuesday. The major US indices finished as follows: Dow +1.39%, Russell 2000 +1.17%, Nasdaq +1.13%, and S&P 500 +1.06%. Bonds rallied as Treasury yields fell substantially across the curve, mostly on Monday after Trump’s Treasury Secretary nomination (viewed as less aggressive on tariffs). The 2-year Treasury yield fell 22 basis points to 4.16% while the 10-year yield fell 23 basis points to 4.18%. Bitcoin fell 1.6% after reaching a record high the week prior. Gold fell 2.0% while the dollar index fell 1.7% as strength in the Japanese yen continued. Crude oil fell 4.5% mainly over the ceasefire agreement in the Middle East.

Recent Economic Data

• Personal Income & Outlays: Personal income increased at a faster pace than expected, rising 0.6% in October, double the expectations and double the rate from September. The largest component, wages and salaries, increased 0.5% after a 0.4% increase in September and is up at a 5.6% annualized pace over the past three months. On the other hand, consumer spending rose at a 0.4% rate in October as expected, and up 4.8% annualized over the past three months, continuing to drive a majority of economic growth. Spending on goods was unchanged in the month while spending on services rose 0.5%, remaining the stronger part of the economy. The personal savings rate was 4.4%, up from 4.1% last month but still lower than the recent average. The PCE price index increased as expected across the board – the headline index rose 0.2% in the month, matching last months pace, and was up 2.3% from a year ago. The core index (excluding food and energy prices) was up 0.3% in the month and up 2.8% from a year ago, accelerating from the 2.7% rate from September.

• Case Shiller Home Price Index: The Case Shiller home price index reported home prices across the country rose an average of 0.3% (after seasonal adjustments) in September, coming after a 0.3% increase in August. Compared to a year ago, the average home price has increased 3.9%, slowing from the 4.3% annual gain in August. There has been a slight change in regional changes, with the Mid West and Northeast seeing the fastest pace of price increases, while the South is seeing the smallest increases. The New York area led out of all 20 major cities tracked with a 7.5% annual increase, followed by Cleveland’s 7.1% increase, while Denver, Tampa and Portland saw the smallest increases at 0.2%, 1.0%, and 1.0%, respectively.

• New Home Sales: The number of new home sales, which tends to be volatile month to month given the smaller sample sizes, saw a big decline of 17.3% in October to a seasonally adjusted annualized rate of 610,000 homes, the lowest pace in two years. This is 9.4% below the 673,000 pace from the same month a year earlier. The median price of a new home rose 2.4% in the month to $437,300, and is up 4.7% from a year ago. The supply of new homes on the market improve somewhat, up 20k to 492,000 units, and seeing solid improvement over the past 12 months, up a total of 42k.

• Durable Goods Orders: New orders for durable goods increased 0.2% in October, much less than the 0.5% increase expected. The transportation category tends to be an extremely volatile part of the index due to the size of aircraft orders. The category declined 2.1% in the month so was not a big impact on the overall index. Core capital goods orders fell 0.2%, a disappointing number. The most important number, as it is an input to GDP for business investment, is shipments of nondefense core capital goods excluding aircraft which increased 0.2%.

• GDP (second estimate): The second estimate on third quarter GDP, based on more complete source data, was unchanged with GDP growing 2.8% on an annualized basis in the quarter. Revisions included upward revisions to inventory investment and business fixed investments, while downward revisions were seen in consumer spending and exports.

• Consumer Confidence Survey: The Conference Board’s Consumer Confidence index rose to 111.7 for November, up from 109.6 in October, near the high end of the range of the past two years. The present situations index rose 4.8 points to 140.9 while the expectations index was relatively unchanged at 92.3. The report noted driving confidence higher in November was optimism in the labor market.

• Jobless Claims: The number of jobless claims for the week ended November 23 was 213,000, down 2,000 from the prior week with the four-week average relatively unchanged at 217,000. The number of continuing claims was 1.907 million, up 9k for a new three year high, while the four-week average rose 14k to 1.890 million, also a three year high.

• Money Supply: After falling for about 18 months in 2022 and 2023, money supply has been back on an upward trend, increasing $88.5 billion in October, or 0.4%. Money supply, which includes cash, deposits at banks, and money market balances, is now up roughly $650 billion, or 3.1%, from a year ago for the highest annual increase in over two years. Money supply fell 4.9% from its peak April 2022 to its low in October 2023, has risen 3.1% since the recent lows, but still below the all-time high by 1.9%.

Company News

• Qualcomm’s Interest in Intel: Bloomberg reported Qualcomm’s interest in possibly acquiring Intel has waned due to the complexities around the takeover, including regulatory and operational hurdles, as well as assuming Intel’s $50 billion in debt. The report adds Qualcomm could look at acquiring parts of Intel, particularly its design business, or reintroduce the idea at a later date.

• Intel’s CHIPS Act Award: Intel said the Biden Administration has finalized a $7.86 billion award to Intel as part of the US CHIPS Act in effort to advance Intel’s commercial semiconductor manufacturing and advanced packaging products in the US. Intel said the award will, in addition to the 25% investment tax credit, help support its plans to invest at least $100 billion in the US. 

Other News:

• Tariff Threat: In a post on Truth Social, Trump threatened to impose new tariffs on the top US trade partners, saying one of his first executive orders would include a 25% tariff on all products coming into the US from Mexico and Canada until the flow of illegal immigration and illegal drugs into the US is addressed, as well as a 10% tariff on all goods coming from China until the issue on the flow of drugs is resolved. A key item and often controversial topic of Trump’s campaign agenda involved the use of tariffs. The threat of new tariffs brings back the risk of a trade war (something we saw in a majority of his first administration) with some thoughts it will reignite inflationary pressures. The biggest market impact occurred in the currency markets with the three country’s currencies falling relative to the dollar. This may all be part of a negotiating tactic, but we know it is still a real risk. The lack of market reaction makes us believe markets believe this is part of a negotiating tool and less of a policy impact and we believe this is the case since he linked the tariffs to things like immigration and drugs rather than trade and the economy. Mexico and Canada have since responded with retaliatory tariffs and warned of the risk these tariffs pose to companies.

• Treasury Secretary Nominee: As mentioned last week, President-elect Trump made it official with naming Wall Street veteran and hedge fund manager Scott Bessent as Treasury Secretary. Bessent is seen as market friendly and in past interviews his first priority would be to implement Trump’s tax cut plan (extended the 2017 Tax cuts that expire at the end of 2025). He will focus on his “3-3-3 policy” that includes cutting the budget deficit to 3% of GDP by 2028, creating 3% GDP growth driven by deregulation, and producing an additional 3 million barrels of oil per day.

• Weight Loss Drug Coverage: The Biden Administration has proposed a new rule that would expand coverage of weight loss drugs under Medicare and Medicaid. Current rules state these programs cover the use of anti-obesity drugs only for certain conditions like diabetes. The proposal would expand access to the weight loss drugs to those considered obese (someone with a body mass index of 30 or higher). The National Institution of Health estimates that 74% of US adults are overweight and nearly 43% of US adults are obese. An estimate shows the additional coverage would cost taxpayers $35 billion over the next decade.

• Middle East Ceasefire: Israel and Hezbollah, the Lebanese militant group, have reached a 60-day ceasefire agreement, beginning Wednesday morning brokered by the US and France. The US, with the help of Egypt, Qatar, and Turkey, are working on making another cease-fire agreement between Israel and the Iran-based militant group Hamas.

WFG News

WFG Closed November 29

Please note that Wentz Financial Group will be closed Tuesday December 24th and Wednesday December 25th. We will be back open Thursday morning the 26th.