Tariffs Aggravate Trends Already Underway

Source: Adrian Day 04/14/2025

Instead of looking at company news as he usually does, Global Analyst Adrian Day looks at the impact of Trump’s tariffs on the economy and markets.

President Trump’s tariffs were more aggressive than generally expected, introducing the highest U.S. tariff rates in more than a century, with a 10% baseline tariff for all countries and goods with few exemptions. These include copper, gold, energy, critical minerals (not available in the U.S.), pharmaceuticals, and semiconductors.

The tariffs are the centerpiece of the Administration’s economic program aimed at making foreigners pay more and returning manufacturing to the U.S., and can be seen at the spearhead of the so-called Mary-A-Lago Accord, which we have discussed before. Already, the first quarter of the year looks completely different, both in terms of policy and market behavior, from previous years, and it gives a foretaste of what we can expect over the next four years.

Above all else, we can expect uncertainty and, with it, volatility. The economy may see a slowdown in economic growth along with persistently high inflation. In the markets, the winners of the last four years — U.S. stocks, tech, the dollar — may not be the winners of the period ahead. Gold, which has actually gained more than the S&P Index over the past four years, will continue to shine: it responds well to uncertainty, whether geopolitical, economic, or monetary.

Amid Stubborn Inflation, the Economy Was Weakening Before Tariffs

The threat of and the imposition of tariffs may have provoked many of these moves, but in reality, the trends, both in the economy and markets, were already underway or in the cards before Trump took office. We have argued before that the U.S. economy was already heading toward recession, with sluggish consumer spending amid a tapped-out consumer.

Manufacturing had been down for several quarters. Recent job’s reports, with high numbers of government and part-time workers as well as constant revisions, were not as strong as headlines would suggest. Friday’s apparently strong pre-tariff report was not as solid as it would first appear. State and local government workers increased by 23,000 (against just 4,000 fewer federal government workers), and the report was accompanied by a large revision to the prior months’ numbers, down 40,000. Price inflation has been tending upward since last July and remains noticeably above both where it was pre-COVID and the Federal Reserve’s own arbitrary inflation target.

This points to stagflation ahead, and this scenario has been gaining much traction among leading analysts. Goldman Sachs, for example, has increased its price inflation targets and says that the risk of recession is now at 35%. Bank of America now says stagflation is their “new base case.”

Stocks Remain Expensive as Long-Term Weakness Starts

And the stock market, despite new index highs, was as overvalued and overextended as it had ever been, ending the year with the worst breadth ever. This was a market ready for a correction. The Trump tariffs may push the economy and markets and make the near-term decline worse, but the direction of travel has already been determined.

U.S. stocks remain overvalued, even after this past week’s declines, still trading above 20 times earnings. The recent decline takes the market back to where it was only a year ago; it has been sharp, but by no means have we seen the kind of capitulation that markets long-term market lows. What we have seen already this year is but a foretaste of what could be an extended period of decline.

That decline will see a rotation out of the erstwhile leaders and into markets and sectors that have lagged or that offer attractive valuations. In the immediate term, we could see a contrarian bounce — the mid-March rally was very meager — but further out, we suspect the S&P will be lower. The American Association of Individual Investors sentiment index has its third-highest bear reading in its history,y back to 1987. Significantly, the two highest were right at the bear-market lows in October 1990 and March 2009.

Friday, April 4, saw 15 new highs on the New York Stock Exchange against well over 1,000 new lows; such lop-sidedness could be a sign of shortterm bottom. After a strong bounce, however, I suspect we shall see an extended period of weakness, and will not see the early February highs again for a long time.

What Assets, Sectors, and Markets Will Do Well if US Stocks Decline?

If we do see an extended period of weakness in the stock market, history would suggest that short-term Treasuries and gold are the assets most likely to do well; other commodities also often do well. And even within equities, some markets and sectors start to outperform as the old leaders fall. These include defensive and dividend-paying stocks, as well as small-cap value. Global markets could also benefit from the weakness in the U.S. market; they have experienced the longest period of underperformance relative to the U.S. ever.

But a change was already underway. In the first quarter, just before the tariffs were announced, stocks outside the U.S. (per Morgan Stanley-Capital International World Ex-U.S. Index) were up 6.5% this year, against a negative 4% plus for U.S. stocks. Even after the sharp declines in global markets after the tariffs, non-U.S. stocks are still positive for the year against declines of almost 14% for the S&P and over 19% for the tech-heavy Nasdaq. In the U.S., growth stocks, which have dramatically and consistently outperformed value since the Great Financial Crisis, the trends have reversed, with value now outperforming growth and small-cap value even more so.

These styles, sectors, and markets are the ones that should outperform in the next period. The extent to which various groups outperform depends largely on how the dollar, interest rates, inflation, and other economic factors perform. Rising interest rates would dampen returns on dividend-paying stocks, while a declining dollar should help emerging markets, for example.

Drivers of Gold’s Bull Market Remain

But, the sector most likely to outperform is the commodity sector, and within that, gold has the best risk-reward profile. Though commodities are generally likely to outperform, they have a risk that gold will not, namely a sharp economic slowdown in China and global economic retraction.

Gold, however, does not have that risk. We have discussed several times why gold has been going up, and the drivers for gold demand are still intact. The Trump agenda will do nothing to change these drivers: the weaponization of the dollar remains, the threat to the Chinese economy remains, and unsustainable government deficits remain.

None of this is likely to change, and gold thus is likely to continue to move higher, notwithstanding a near-term overdue pullback. TD’s analyst calls gold “overextended but not overbought,” which is exactly right. It has moved well above the trend line, but there is yet no manic buying, certainly not in North America; indeed, premiums on coins and bars tell the opposite story.

Commodities, Very Undervalued, Could Soar

As for the broad commodity complex, it is close to century-long lows relative to financial assets. Analysts Goehring & Rozencwajg have note that every past commodity bull market has been set in motion by a shock to the global monetary system, citing 1929 (end of the return to the gold standard), 1969 (end of Bretton Woods), and 1999 (end of the dollar pegs).

“A major shift in the global monetary system may be imminent,” and commodities are already responding to this. “If gold is the canary in the mine, it is singing loudly,” they write.

Each of those previous troughs in commodity prices against financial asset prices, was followed, not only by strong bull markets in commodities but also by weakness in stock markets. After the 1929 peak, the Dow fell 88%. After 1969, stocks took seven years to exceed their high, while the S&P did not reach its dot-com bubble highs again until 2007, and then only very briefly, not to move sustainably higher until 2013.

The Fed Will Change Policy

Federal Reserve Chairman Jerome Powell now says that tariffs could have a persistent inflationary impact rather than have the one-off, temporary adjustment he saw just a couple of weeks ago. In a speech on Friday, he reiterated the Fed’s wait-and-see approach, but the market is now betting on four rate cuts this year.

Perhaps more important than rate cuts will be a new round of Quantitative Easing that we forecast last week. This will help the bond market but will not be sufficient to help the economy or the stock market meaningfully.

TOP BUYS this week include Ares Capital Corp. (ARCC:NASDAQ), Altius Minerals Corp. (ALS:TSX), Pan American Silver Corp. (PAAS:TSX; PAAS:NASDAQ), Midland Exploration Inc. (MD:TSX.V), Lara Exploration Ltd. (LRA:TSX.V), Orogen Royalties Inc. (OGN:TSX.V), Metalla Royalty & Streaming Ltd. (MTA:TSX.V; MTA:NYSE American), and Fox River Resources Corp. (FOX:CSE). We should warn, however, that if the markets open down on Monday, all the above stocks, to greater or lesser degrees, will likely trade down, and you may be able to buy for less during the day. If, however, the markets open up and begin their recovery rally, I don’t expect them to run away from us.

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Important Disclosures:

1. As of the date of this article, officers and/or employees of Streetwise Reports LLC (including members of their household) own securities of Altius Minerals Corp., Pan American Silver Corp., Midland Exploration Inc., Lara Exploration Ltd., Orogen Royalties Inc., Metalla Royalty & Streaming Ltd. , and Fox River Resources Corp.
2. Adrian Day: I, or members of my immediate household or family, own securities of: All. My company has a financial relationship with: All. I determined which companies would be included in this article based on my research and understanding of the sector.
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Adrian Day’s Global Analyst is distributed for $990 per year by Investment Consultants International, Ltd., P.O. Box 6644, Annapolis, MD 21401. (410) 224-8885. www.AdrianDayGlobalAnalyst.com. Publisher: Adrian Day. Owner: Investment Consultants International, Ltd. Staff may have positions in securities discussed herein. Adrian Day is also President of Global Strategic Management (GSM), a registered investment advisor, and a separate company from this service. In his capacity as GSM president, Adrian Day may be buying or selling for clients securities recommended herein concurrently, before or after recommendations herein, and may be acting for clients in a manner contrary to recommendations herein. This is not a solicitation for GSM. Views herein are the editor’s opinion and not fact. All information is believed to be correct, but its accuracy cannot be guaranteed. The owner and editor are not responsible for errors and omissions. © 2023. Adrian Day’s Global Analyst. Information and advice herein are intended purely for the subscriber’s own account. Under no circumstances may any part of a Global Analyst e-mail be copied or distributed without prior written permission of the editor. Given the nature of this service, we will pursue any violations aggressively.

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