THERE ARE MILLIONS who can’t understand why the stock and bond markets swooned and remain down for the year. After all, they keep hearing that everything is good and that the country’s imminent return to greatness is assured. I would only have a few words for members 0f such a group: The markets do not lie. 

The stock and bond markets–usually through indexes comprised of the larger public companies in the US–are handy in that they give us current values of the  vehicles that people around the world use for savings and investment. More accurately, though, these financial assets (i.e. stocks and bonds) are actually forecasts of  economic conditions for corporate earnings in the near future–usually one or two years out. So the current market behavior implies weaker economic conditions ahead. WHY?

There a number of reasons, most of which have been trotted out across media outlets, for the negative outlook.  The biggest single reason offered is the sudden imposition of tariffs and the resulting potential for global tariff wars. This is logical because in economic theory, tariffs are patently inefficient and usually inflationary. Another reason for the weaker outlook is the uncertainty surrounding tariff policy and the unprecedented haste with which these policies were put in place. And this is also logical because uncertainty is a form of risk; investors invariably prefer predictable assets to unpredictable (uncertain) ones. You could also say that investors will pay less for an unpredictable asset than a more predictable one given all else is equal.

Bonds–primarily treasury notes and bonds–are playing an outsized role this time around, though. US treasuries, because of their “ultra-safe” nature, typically act as the foundation for interest rates on other kinds of debt: corporate and municipal and so on. But treasury notes and bonds are now viewed as having more risk now because the US gross deficit keeps getting larger and the current administration wants to renew the tax cuts of four years ago–which would make the deficit worse unless spending decreased in equal measure (this works to explain the rush to cut government spending).  But falling bonds mean rising interest rates. Perhaps the most stunning reality about the US deficit and the price bonds (or the related high rates) is that the  interest payments alone were over one trillion dollars last year.

So the markets don’t like the math as it concerns the economy, inflation, and the deficit. And the markets will always “stay away” from uncertainty. So the market’s message to the powers that be is clear: go easy on the tariffs, don’t put the country more deeply into debt, and be steadier, more forthcoming, and clearer about new and future policies.

You may be able to fool some of the people all the time, and all the people some of the time, but you can’t fool the market.

WRH