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ANOTHER UGLY DAY

Markets fell on thin holiday trading, the accepted catalyst were concerns that the President will fire FRB Chair Powell, perhaps ending the perceived perception of central bank independence.

It is widely accepted the Administration has already instilled ever higher levels of uncertainty into the economic outlook with many stating yesterday’s global trade structure as dead.

Every President since Jimmy Carter, and perhaps even before, has asked/demanded/called for the Federal Reserve to lower interest rates.

Some newswires are filled with sensationalist stories about foreigners dumping Treasuries, the dollar, etc. because of Trump’s policies.

Regarding the dollar, it has been discussed that the Trump Administration is attempting to use the currency as a trade weapon especially given the Treasury Secretary’s history of being a FOREX trader and made billions thirty years ago with Soros Global Management shorting the British Pound.

According to Bloomberg, the US dollar is 10% higher than that of the average level of last decade and “much higher than decade before.”  The 10 and 30-year Treasury are still considerably lower in yield than they were in January 2025.

The dollar as the only reserve currency was first threatened by the US led effort to force Russia into bankruptcy following the invasion of Ukraine, a move that caused a shift of sovereign funds into other currencies to diversify.

It is widely accepted all markets are devoid of liquidity, the result of regulatory fiat that has eviscerated the market stabilizing mechanisms, amplified by the proliferation of the levered “carried trade” which aims to take advantage of the very small difference between cash and future prices levered a gazillion fold.

All regulatory entities have commented about the lack of liquidity and the potential dangers of the “carried trade,” but to date has not taken any action.

In about a week there will be the initial estimates of first quarter growth.  Many are suggesting growth has contracted, the result of the surge in imports and gold.  Businesses and consumers alike have front loaded inventories from our trading partners before the tariffs went into effect [Imports subtract from GDP].

If the economy is on the verge of a recession, the current projected recession will be different than the typical business cycle recessions the economy has experienced in the past.

Policy uncertainty is causing some businesses to pause expansion plans, unsure of what tariff and other tax policies will prevail 6-12-24 months from now.  Consumer sentiment is horrific.

Can it be suggested that consumers and businesses be ahead of the actual tariff policy?  Fear is more powerful than greed.  Uncertainty is only rising and markets [and most people] do not like uncertainty.

This week over 100 S & P 500 companies post results including several tech leviathans. Will first quarter results be dismissed as they were before “Liberation Day?”  

Perhaps the only certainty to write that if a company misses projections, those shares may be severely punished.  Moreover, forward-looking statements might be lacking given the gargantuan levels of uncertainty.

Commenting on yesterday’s market action, all markets traded lower.  The Russell 2000 is down about 17.5% YTD and about 5.5% from a year ago.  The NASDAQ is off about 18.5% YTD and only posting a 3% 12-month return, shattering the illusion of “safety” in the largest capitalized companies.

A major issue at hand is the massive concentration of funds in 7-10 companies.  Who is left to buy these shares when selling commences?

Longer dated Treasuries continued to sell off causing a steepening of the yield curve.  If the Fed is forced to lower interest rates, longer term inflationary expectations will rise.  Inflation has been above the 2% mandated speed limit for over 5 years.  It is widely expected inflation will rise because of the tariffs.

And then there is the national debt, the gargantuan elephant in the room that is not being addressed.  The country is still voraciously spending, $1 to $2 trillion deficits are projected for multiple years.  Who is going to buy the $9 trillion of the $37 trillion (and growing) worth of debt that matures this year.

Foreigners stopped buying our debt over 5 years ago.  It is not a new environment.

Last night the foreign markets were down.  London was down 0.03%, Paris down 0.68% and Frankfurt down 0.70%.  China was up 0.25%, Japan down 0.17% and Hang Seng up 0.78%.

Futures are nervously higher by 0.75% ahead of TSLA’s earnings released at the close and Thursday’s release of GOOG results.  The 10-year is up 2/32to yield 4.39%.

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Kent Engelke

Chief Economic Strategist Managing Director

The views expressed herein are those of Kent Engelke and do not necessarily reflect those of Capitol Securities Management. Any opinions expressed are statements of judgment on this date and are subject to certain risks and uncertainties which could cause actual results to differ materially from those currently anticipated or projected. Any future dividends, interest, yields and event dates listed may be subject to change. An investor cannot invest in an index, and its returns are not indicative of the performance of any specific investment. Past performance is not indicative of future results. This material is being provided for informational purposes only. Any information should not be deemed a recommendation to buy, hold or sell any security. Certain information has been obtained from third-party sources we consider reliable, but we do not guarantee that such information is accurate or complete. This report is not a complete description of the securities, markets, or developments referred to in this material and does not include all available data necessary for making an investment decision. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Investing involves risk and you may incur a profit or loss regardless of strategy selected. There is no guarantee that the statements, opinions or forecasts provided herein will prove to be correct. If you would like to unsubscribe from this e-mail distribution, please reply to this e-mail and indicate that you wish to unsubscribe in your response.