The CatShark Report
Introduction
Even as we had a very difficult month, the market and our benchmarks had an even worse one. By shifting gears on April 11th, we extended our lead on all market benchmarks except for the Class Blended where we stayed exactly even (the Class Benchmark measures our performance based on how much fixed income we have in portfolios.)
Back On Track, Sort Of
While the shift is working, not all accounts are back in positive territory today. Our April shift was a radical move taken because our portfolio design was too tied to the Trump Administration sorting the trade situation better. As the chaos built, we pulled hard on the reigns to take a more skeptical view. The resulting portfolio scatter has some accounts recovering faster and we expect these differences will narrow throughout the rest of the year provided we have no more bad shocks.
Even as we breathe again after making the shift, we cannot relax because we may still have bad shocks ahead. Let’s discuss where we are and where we are heading.
Risk Is Higher Today
As the market celebrates companies reporting good results through March 31st, those numbers are largely irrelevant after April 2nd. The tariff situation is so bad most companies have lowered or removed their estimates for how the rest of the year will unfold. That hasn’t happened to this degree since March 2020 when COVID fully landed. Today, we face these increased risks:
- Existing tariffs alone will throw our economy into much slower growth and even a recession;
- Our average tariff is still far higher than April 1st, and that is affecting prices and trade;
- Containers coming from China have dropped drastically; and
- The President is telling people to expect more problems for another 90 days.
- Tax cuts will most likely make our deficit problem worse;
- The Administration is claiming tariff revenues will offset the tax cuts and the math is not close to working at current tariff rates (they would need to be far higher); and
- Even if we raise taxes on the very richest Americans, most of the tax cuts are not paid for and that will put us in a worse deficit position.
- The Federal Reserve will have to let unemployment get worse if inflation readings are also rising;
- This is a knife’s edge issue where the Fed is pulled in two directions at the same time. We know from experience that favoring employment over inflation leads to worse problems and we expect this Federal Reserve will fight inflation first. The Administration, however, will fight for higher employment and that will get messy; and
- Rising unemployment will very likely throw us into a recession.
These issues were not this bad on March 31st.
Meanwhile, the broader stock market is celebrating strong 1st Quarter results which is very much whistling past the graveyard at midnight because tariff-driven problems have not yet fully landed. We expect over the next several weeks that ports and trucking will see very reduced activity (especially on the West Coast) and retailers will raise prices to reflect tariffed items.
What It Means for Us
We expect to be in some sort of recession this year; and we are holding some positions that will benefit greatly if we do not. These are really the two most important issues today and our shift has us far better positioned than we were on March 31st.
We hope the Administration’s policies will become less “maximally flexible” so we can count on important economic factors working more normally. We want to emphasize that we are not rooting for these increased risks to bite us, but we must prepare because they are so much higher today.
Catshark trying to peek around corners.