Market Commentary Headlines

MarketMinder’s View: Japanese GDP contracted -0.7% annualized (-0.2% q/q) in Q1, and as with most economic series these days, analysts blamed the weak components on US trade policy—an odd conclusion, as we will explain. That focus, however, overshadows some positive developments. “Exports fell 0.6% quarter-on-quarter, shedding 0.8 percentage points off the GDP as uncertainties caused by U.S. President Donald Trump’s trade policies affected Japan’s export-heavy economy. Domestic demand, however, was a bright spot, growing 0.6% in the same quarter and adding 0.7 percentage points to the GDP.” As for exports, it is a bit odd to argue that US tariffs “caused” the fall here, when they “caused” frontrunning in most of the world and US imports boomed. A longer-term view shows that Japanese export volumes—not values, which are skewed by yen volatility—have tumbled in every reported month since last June. (Source: Japanese Customs Office.) So this really looks like more of the same. That isn’t to say there was no effect or will be no effect. But when a trend remains a trend and the theory doesn’t match the rest of the globe, there are reasons to doubt its veracity. The rest of the article wonders how trade talk progress and possible monetary policy changes may affect Japanese growth for the remainder of the year. Fair enough, but human decisions (whether in trade negotiations or the choice to raise, lower or hike policy rates) defy prediction. Note, too, the economic implications aren’t as black and white as headlines make it seem—businesses can mitigate tariffs’ bite, and monetary policy isn’t as economically consequential as commonly believed. We suggest investors focus less on speculative chatter and more on actual action—and how those actions align with expectations.

MarketMinder’s View: As a reminder, MarketMinder is nonpartisan and prefers no political party or politician over another. Our interest is in policy’s economic and market effects only, and in that spirit, this analysis raises some smart counterpoints to the argument that protectionist trade policy will bring manufacturing plants back to US shores. For one, “onshoring” (companies’ relocating production to domestic locations due to higher import costs) is a complex decision. “It is based on the costs of doing business in different countries; tariff and non-tariff barriers of doing business; proximity of production to markets; availability and cost of resources such as raw materials, finance and labor; and companies’ long-term strategies. Onshoring decision analysis itself takes months if not years, and must be cleared by multiple levels within organizations, and by country regulatory agencies at local and national levels.” Besides the logistics, companies must also consider the return on investment. “Companies cannot necessarily trust that the current Trump tariffs will remain stable for long enough to match corporate calculations for return on investment. Large-scale investments involved in moving manufacturing across nations run into the hundreds of millions of dollars. These sunk costs take upwards of 10 years to recoup.” The upshot: Many companies may decide “onshoring” isn’t worth their while and will find other ways to dampen tariffs’ costs. Keep that in mind when pols’ pledge to make major changes to a private sector-driven economy—reality tends to be a bit more complicated than campaign promises would suggest.

MarketMinder’s View: Americans’ moods are down in the dumps, at least according to one widely watched sentiment gauge. “The University of Michigan’s closely watched consumer sentiment index fell 2.7% to a preliminary reading of 50.8 for May, dropping further from April’s reading of 52.2. May’s preliminary reading, the second-lowest on record, landed a touch above the all-time low of 50 notched in June 2022, when inflation was at a 41-year high.” The article attempts to put this in perspective: “Since 1952, when the university started tracking how Americans felt about the economy, there have been nearly a dozen recessions, several oil price shocks, a few wars, a couple of inflationary episodes, a major financial crisis and a global pandemic. Turns out, a massive trade war nearly trumps all.” Perhaps today’s tariffs are worrying respondents more than almost any other external event in five decades. But this gauge has also proven increasingly partisan in recent years and, no matter how folks say they feel about the economy, their actions often don’t follow. In our view, today’s pessimism may be a counterintuitive reason to be bullish. If folks are really as dour as this poll suggests, reality has an exceedingly low bar to clear to surprise to the upside. We don’t dismiss the possibility of trade talk setbacks, retaliatory tariffs and a US recession this year. But other factors (e.g., trade compromises, legal pushback) suggest reality is shaping up to be better than the worst-case outcome—and that relief is a bullish force.

MarketMinder’s View: Please note, MarketMinder doesn’t make individual security recommendations, and the major retailers mentioned here are coincident to a broader theme we wish to highlight. Namely, while tariffs are a negative, you can’t simply pencil in price hikes across the board—a reason inflation fears tied to this are likely exaggerated. Yes, as one economist interviewed here stated, “Absorbing tariff costs through margins can be used to shield customers from price hikes for a time, but the longer the current policy stays in place, the more untenable that becomes.” Still, though, it isn’t all up to the firms affected. The sector and product differences this highlights suggest not all firms have sufficient pricing power to pass much of anything along—not without vast money supply increases there are no sign of today. Now, we aren’t saying tariffs are a nothingburger. They are negative. The broad uncertainty surrounding US tariff policy (from “Liberation Day’s” announcement of bigger-than-anticipated tariffs to a 90-day pause a week later) makes it difficult for companies to plan, and many are taking a wait-and-see approach while also preparing for worst-case scenarios. That is a headwind for growth—haphazard policy changes discourage risk-taking. But this is an area where we see excessive negativity in markets and the disparate price effects this article documents are evidence of just that.

MarketMinder’s View: One thing we are watching closely as we assess tariffs’ potential market impact is whether they spark a global protectionist wave. Not just in terms of retaliation to US tariffs, but whether more countries adopt broad tariffs and restrictions. Importantly, this is not an example. Japan is removing small-value imports’ exemption from its sales tax, which is all about creating a level playing field with Japanese retailers. A sales tax doesn’t favor domestic producers over foreign, or vice versa. The tariff exemption will remain in place so as not to overburden Japan’s customs agents. It is an interesting development but not something with major protectionist implications (oh, and MarketMinder doesn’t make individual security recommendations—we highlight this for the broad theme only).

MarketMinder’s View: Retail sales basically matched expectations in April, rising 0.1% m/m. While that indeed qualifies as “barely” rising, note that it follows March’s 1.7% jump as people front-ran tariffs. Thus far, this hasn’t created a huge demand pothole. Instead, sales overall held firm in April even as demand shifted from physical goods to food service. Winners and losers, yes, but not a broad demand pullback. Now, this doesn’t tell us what will happen, and it isn’t a clear look at tariffs’ implications. Reciprocal tariffs—currently on pause—won’t take effect until July at least. China tariffs were triple-digit in April, an effective embargo, but are down to 30% for now, at least … but tariffs on small-value packages from China and Hong Kong didn’t take effect until May 2. The only thing consistent the whole way was the 10% blanket tariff on all imports, and it is too soon to know how broadly retailers are passing this to consumers, as they are still working through stockpiled inventory. So we agree with the broader wait-and-see mentality here. Notably, the tone on that front is quite pessimistic, suggesting reality will have a low bar to clear to continue delivering positive surprise.

MarketMinder’s View: Well this is quite interesting. After 2007 – 2009’s global financial crisis, regulators globally beefed up bank capital requirements, with the goal being for banks to have enough of a cushion to absorb loan losses and paper losses without having to resort government support. It was a well-intended effort, and by leading banks to rebuild balance sheets, it was beneficial. But there were also some side effects, as it left banks trying to hit several capital targets at once, some of which were a bit overkill. It also ignored the simplest solution for banks in a crisis, which is to seek funding from the Fed’s discount window, designed to be lender of last resort. Hence, banks have long sought some tweaks, whether through lower requirements or more favorable risk-weighting for certain reserve assets, like US Treasurys. As reported today, this may now be in the offing: US regulators are considering reducing the supplementary leverage ratio, which is an alternate and tougher measure than the standard tier one capital requirement. In the UK, Chancellor of the Exchequer Rachel Reeves also instructed regulators to explore easing the rules—and in both cases, increasing lending is the goal. In our view, this is an encouraging development, even if it isn’t an immediate economic tailwind. There isn’t much evidence tougher capital requirements actually reduced risk in the financial system. Rather, they seem to have pushed a lot of lending activity toward so-called shadow banking, including private credit. That is less transparent than old-fashioned bank lending, long the lifeblood of economic growth. Easier rules won’t make banks suddenly live on the edge, as they have held capital in excess of tier one requirements since the immediate post-crisis era. But easing collateral requirements gives them more flexibility and enables more risk-taking, which should ripple through the broad economy if this comes to fruition. So keep an eye out and prepare for people to see it as a very bad thing, which could give it stealthy bullish power.

MarketMinder’s View: We differ with the broad market outlook here, as we think this spring’s volatility is likely a classic correction—a short, sharp shock as markets quickly priced tariff fears and announcements, rapidly discounting feared worst-case scenarios and setting the stage for recovery as things gradually shape up better than expected. Perhaps that recovery is underway now. Perhaps there will be another shock to make stocks retest early April’s lows. Both are unknowable, given the role sentiment—always fickle and unpredictable—plays. But our main issue with this piece is the mindset it promotes: a behavioral error we call “breakevenitis.” This is that mentality in a nutshell: “If, earlier in the year, you disregarded the opportunity to reset your portfolio for a changing world, you now have another chance to do so. Take it. It’s always easier to re-order your asset allocation from a position of strength. Selling at a loss is difficult because we are hardwired to deny the fact that our investments are no longer worth what we paid for them. Having recouped 2025’s losses, you are probably sitting on gains again. Cashing them in for something that now looks better will feel painless.” Look, we are always for ensuring a portfolio is positioned properly for expected developments over the next 3 – 30 months or so, and volatility can present attractive opportunities to shift between sectors and industries (or among different bond types). But none of it should be in reaction to what already happened. And it shouldn’t rest on a desire to prevent a portfolio wound that you have already suffered. The problem with selling because markets are at or near breakeven is that it overemphasizes past declines while downplaying the potential for recovery and ignoring both an investor’s long-term goals and the returns necessary to reach them. Selling at breakeven isn’t painless—it could well keep you from the returns you need to reach your goals, which is quite painful indeed. For more, see last week’s commentary, “Don’t Sell in May to Breakeven.”

MarketMinder’s View: With Wall Street trying to push so-called “alternative” investments like private credit and equity into everyday savers’ retirement accounts, doing due diligence is key. This longish piece touches on some interesting developments in the private credit space, and as a reminder, MarketMinder doesn’t make individual security recommendations; our interest is in some broader themes.) For example, how private credit’s illiquidity and less-frequent valuations can obfuscate daily volatility. “So far this year, direct-lending funds have been almost boringly steady when set alongside the equity market’s wild rollercoaster ride—so long as you ignore the industry’s reluctance to change where it ‘marks’ investments. ‘The luck of timing,’ has helped, according to Adam Grimsley, a private credit consultant for investors. ‘Liberation day’ happened on 2 April, 24 hours after most firms produce quarterly valuations for investors. Many fund managers won’t have to update their marks until 1 July, by which time much of the tariff-related volatility may have blown over.” In other words, it isn’t as if private credit is inherently steadier than other assets. Quarterly pricing can just smooth over some of that short-term bounciness. However, not knowing what price an investment will fetch at any given time is different from assuming a months-stale mark is somehow valid—a potentially big blind spot. Now, we have nothing against alternative investments per se, but their lack of liquidity and transparency—not to mention whether they even put you in a better position to meet your financial needs and goals—should give interested parties pause. For more on why, please see last month’s commentary, “Investing Isn’t Collecting, Private Equity Edition.”

MarketMinder’s View: Please note, MarketMinder is nonpartisan and doesn’t prefer one party or politician over another. Our analysis focuses on politics’ market and economic implications only. In that spirit, this piece smartly points out that neither Republicans nor Democrats view the decline in US manufacturing jobs quite right. As the title implies and as described here, the reason for the misperception is because “The Rust Belt’s manufacturing decline isn’t primarily about jobs going to Mexico. It’s about jobs going to Alabama, South Carolina, Georgia and Tennessee. ... In 1970, the Rust Belt was responsible for nearly half of all manufacturing exports while the South produced less than a quarter. Today, the roles are reversed, it is the Rust Belt that hosts less than one-fourth of all manufactured exports and the South that exports twice what the Rust Belt does.” The piece presents several reasons why, but in sum: “Right-to-work laws, cheap energy, affordable housing, low-cost land, fast permitting, low taxes, immigration. That’s a powerful combination, and it has had big effects. In 1992, there was not a single auto plant in Alabama. Today, Alabama is the No. 1 auto-exporting state, producing more than 1 million vehicles a year. That’s brought more than 50,000 jobs and billions of dollars in investment. ... just one example of the South’s burgeoning economic prowess. Of course, if the question is about manufacturing employment, automation has played a big role in the decline of manufacturing employment across all regions. Modern factories simply require fewer workers to produce more goods.” We don’t dismiss the job losses tied to these longer-running developments, but for investors this is sociological—not a material driver of the economic factors cold-hearted markets care most about, in our view.