Zervos: The market has been extremely resilient despite rising trade tension

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All right, what do you make of just the kind of market movements we've seen in the last, you know, four or five trading days or so after the president kind of ramped up the tensions in the trade war, we saw a big decline in since then we've been kind of range bound. What does that say about investors and their confidence that this trade war is going to be resolved in a positive way?

Frank

David Zervos

Well, I think the market has been equity market in particular, Frank, has been extremely resilient in the face of a pretty significant escalation in the rhetoric between the two biggest economies on the planet and their trading relationships. So this is a pretty big change in how we've seen both the US and China treat each other in public and presumably in private. It’s probably even a little bit worse. And the S&P shrugging it off largely and I think that's an amazing story. It does maybe tell you that we're sort of sick of talking about the trade war. We're sort of not getting worried about what we saw in April, which was two things: One was the inflationary consequences of the tariffs that don't seem to be particularly large after a lot of experience with tariffs over the last six to seven months. But also that these are negotiating tactics. There's a lot of huff and puff and then people come together and they figure it out. And that seems to be the nature of where we've got these trade impacts on the market. We've got them sitting at the moment. I think that's probably a good thing.

And David, your word of the day is resilience as well. So you're seeing a lot of resilience in the market right now. I want to ask you, we're missing some economic data. We're supposed to get CPI and PPI this week, but we did get the Fed Beige Book. And the Fed Beige Book pointed to tariffs raising prices. Also consumers on the lower and middle feel in some pressure due to all this. Isn't that a bit concerning, especially when we continue to say that earnings are really what's propping up the market right now? I mean, if tariffs are increasing prices, won't that eventually hit earnings, whether it be revenue, margins, earnings themselves, or will the consumer possibly stop spending so much because they’re under pressure? Isn't it time to start thinking about that tariff risk in the market?

Frank

David Zervos

I think on the other side of that, you had Pal this week talking pretty dovishly about his belief that those risks you just highlighted — are from the Beige Book and from the Fed — are weighing into the factors that are going to be moving rates over the course of the rest of this year. And certainly we're looking at at least a couple more and maybe a couple more into early next year to really get the rate side moving and the tailwinds from monetary policy easing into the system relatively soon. And that's hitting the forwards, that's hitting expectations. We've got the 10-year almost below 4%, and you know 100 basis points lower in rate expectations since the beginning of the year. That's a pretty positive tailwind. You know, at the beginning of this year Frank, most market participants were basically saying that the equilibrium rate structure was going to settle in around 4% at the front end and now it's basically at 3. I think it's on its way to 2 and a half, maybe two and a quarter back to where it was in 2019. But we'll see whether that debate picks up into 2026. But I think that's a huge tailwind that can offset exactly what you’re saying, Frank, which is that there is weakness.

You're very optimistic, but I think another way a lot of people like to use about how you feel about all this is a bit complacent because there's certainly some risk out there that you're saying the markets kind of shrug off. There is the private credit situation, Jamie highlighted talking about cockroaches out there. There's also trade tensions, the possibility of 100% additional tariffs on Chinese goods. I want to point out something else in the FT today, BlackRock and Fidelity actually shorting corporate bonds, seeing spreads at their tightest since pretty much since the Great Recession. Isn't that another troubling sign that these two big-name investors are also seeing some issues when it comes to spreads and potential distress when it comes to corporate bonds?

Frank

David Zervos

Well, Frank, it sounds pretty typical of the rhetoric I've heard over and over again. And at the same time, we saw JPMorgan in particular talk about investing $1.5 trillion in the United States. So, on one side the world's falling apart, on the other side you're putting a trillion and a half dollars to work. I think it's a little bit much to get excited about that storyline. I don't want to say complacent, I think that's a dangerous word. I'm never complacent. And part of what I think is a backstop and why I think if some of those risks that you highlight, which are legitimate risks, we are very tight credit spreads. If there were some sort of pullback or risk-off scenario we're not taking into account, then we have a lot of monetary policy insurance that can come into play.

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