Learn lessons from Trump 1.0 to have a good idea of what to expect in next 2-4 weeks: Hugh Johnson

Financial expert Hugh Johnson warns that current trade tariff negotiations are mirroring the volatile and uncertain 2018-2019 period, creating market unease. He highlights the administration's reliance on tariffs to fund a projected $3.4 trillion ten-year deficit, but stresses that these revenues are insufficient, necessitating substantial borrowing, largely from reluctant foreign investors, which could drive up interest rates. This fiscal and trade landscape presents a complex backdrop for US equity markets, which remain at record highs despite these headwinds.

Analysis

The current trade negotiation environment is characterized by significant volatility and uncertainty, mirroring the dynamics of the 2018-2019 period. This 'on again, off again' pattern is a primary source of concern for business leaders and the equity markets. The administration's fiscal strategy compounds this issue by coupling aggressive tariff policies with expansionary spending, creating a projected $3.4 trillion deficit over the next ten years. While tariffs are being positioned as a revenue source, analysis indicates they will be insufficient to offset this deficit. Consequently, the US will need to resort to substantial borrowing. A critical risk highlighted is the noted reluctance among foreign public and private investors to absorb this new supply of US treasuries, which could necessitate higher interest rates to attract the required capital. This creates a disconnect where equity markets are at record highs, buoyed by the perceived economic stimulus from tax cuts, while significant underlying fiscal risks related to debt financing and potential interest rate hikes are mounting.

Key Decisions for Investors

• Investors should brace for heightened market volatility in the short-term, driven by trade negotiation headlines, and consider reviewing portfolio exposure to sectors highly sensitive to tariff uncertainty.
• Monitor US Treasury auctions and foreign capital flows closely, as any signs of weak demand for US debt could be a leading indicator of rising interest rates and a potential repricing of risk assets.
• Exercise caution regarding the current equity market rally, as it appears disconnected from the underlying fiscal pressures of a large structural deficit and the non-trivial risk of forced borrowing at higher costs.