Economic Flashpoints: Trade, Fed Independence, and the Weak U.S. Dollar

Jeffrey Buchbinder (00:00):

Hello everyone and welcome to LPL Market Signals. Jeff Buchbinder here with my friend and colleague, Dr. Jeffrey Roach to talk a little economy, a little Fed, a little tariffs, and much more. How are you today, Jeff?

Jeffrey Roach (00:17):

Got a lot to talk about. We feel like we say that every week. Isn't that true? And then we indeed have a lot of interesting things to cover. Things are fluid.

Jeffrey Buchbinder (00:27):

They are, I think it's fair to say that since inauguration day, the amount of stuff going on has accelerated, no doubt. So that I think we'll get everyone's agreement. So here's our agenda for today. Yes, a lot going on. We'll probably move through the market recap pretty quickly so we can get to everything else we have for you. Market recap, it was really about tech weakness and trade uncertainty last week. I think it's fair to say those are the two biggest issues that the market was struggling with last week. Second, this will be more for Jeff, economic flashpoints trade, the Fed, and the dollar. Of course, as we're recording this, it's Monday afternoon, April 21st, 2025. And the market is selling off sharply on a number of factors, but I think the tweet from President Trump or post on True social about firing Fed Chair Powell is probably the biggest reason for the selloff today. Although at the same time, we're not getting any trade deals, and it doesn't look like we're making much progress in getting there. So that probably is part of it as well. Next we have a new year end target for the S&P 500, which you wrote about in the Weekly Market Commentary. So we'll walk you through the math on how we get there. And then lastly, of course, previewing the week ahead.

Jeffrey Buchbinder (01:59):

So market recap. You see, this is actually a five-day look, not a four-day look. Last week was holiday-shortened. Of course. Hopefully all of you enjoyed the long holiday weekend. But still the main points that I wanna make here still hold. First that you have defensive sectors outpacing the cyclicals and the higher volatility sectors. And that means that we've got some more work to do from a technical perspective to get this market turned around. Doesn't look like that's happening today, certainly. So energy kind of marches to its own beat. But you have, for example, utilities, a leader, very defensive. Staples, a leader. Very defensive real estate, certainly a yield-oriented sector, and also to some extent defensive. Those are your winners. And then the big tech names, the sectors with those stocks in them, communication services, consumer discretionary, and tech all lagged. And then with the weak dollar that we've seen lately, you see international markets doing better. Certainly that diversification we've really been talking about all year, but diversification into international has certainly helped. Bond market was strong last week. Didn't help the stock market. But I think more important than anything going on in fixed income or commodities is the dollar. So we'll talk more about that in a bit, Jeff, but dollar down, another 2% over the last five trading days. Your high level reaction.

Jeffrey Roach (03:37):

Yeah. Well, I think real big picture here, if you're taking all your comments on international developed sectors, utilities, et cetera, I think one big picture item to put into perspective is we think stagflation is certainly a risk, possibly turning into a base case scenario. And of course when we say stagflation, that just means low or no growth, along with a nagging inflationary environment. So in those stagflationary periods, it's very common to see utilities, consumer staples, commodities, tips, all those things you just highlighted, Jeff, performed fairly well. And that's seems to be a case study here right on point with the views of stagflation.

Jeffrey Buchbinder (04:24):

Yeah, certainly the international markets developed in particular are more defensive. You don't have as much tech over there. And so in down markets, they can hold up better, especially if the dollar's weak, which is a direct boost. And then certainly the rally in gold, which is just unrelenting, is consistent with that defensive posture. So this market, it looks like we might be poised for a retest of the April lows. And until we start to see the complexion of the market change in terms of what's working and what's not, it's gonna be very difficult to make up too much ground. So here's the S&P 500. I put this chart in the Weekly Market Commentary. Adam Turnquist and I jointly wrote that this week. You can find it on lpl.com, where we did two things.

Jeffrey Buchbinder (05:18):

We talk about the technicals of the market, that was mainly him. And then we talk about the price target on the S&P, which we just came out with. That was more me. The point here I wanna make though is that there's support at 4,800 to 4,835. We're still well above that. And this chart is not up to the minute, not real time, but we're still well above that range. That would be where a retest could take us if we get one. Certainly this market is in need of better headlines to turn around. But the good news is this long-term uptrend is still intact that we've been in for the past few years. But at the same time, really nothing is working. I mean, sure, you could argue that utilities and staples have a fair number of stocks still in an uptrend, but that's not enough.

Jeffrey Buchbinder (06:16):

The majority of sectors have a very high percentage of stocks in a downtrend, particularly tech 93% right now. This chart was in the Weekly Market Commentary as well for this week, just to make the point that if we don't get help from tech, it's very hard for this market to make up any ground. Certainly the big tech Nvidia could help us, not helping today. But certainly we'll be looking to that not just Nvidia, but Microsoft and Apple, which are such a big piece of the tech sector looking for those names to push us forward. So let's transition Jeff now to these, what I call economic flashpoints. And I start with trade, then we'll get into the Fed and the dollar. So as we're recording this, I haven't really seen anything good in terms of progress on European trade talks or really Japan or South Korea. I just keep hearing things are close.

Jeffrey Roach (07:22):

Well, that's right. I think there's more of a focus now on the conversations with pushing Fed Chairman Powell out of his position. That seems to be the focus right now for investors. But I thought you're right, JB, in terms of the overall talking points of what's happening in markets and how to think about them. One of the things that I think is helpful during a period of a lot of trade uncertainty, it's helpful to really rank each country and where their risks are and who's going to be perhaps most vulnerable to uncertainty in trade. And what I did here in this graph is pretty straightforward, just a list of the G 20 countries and ranked by the amount of exports as a percent of their economy. And what I found quite striking here on the far left of the screen is Germany, almost 45% of their economy relies on exports.

Jeffrey Roach (08:21):

So they're relying on the global markets and having global consumers being healthy to buy their exports. And the other extreme on the far right is the United States exports as a percentage of our economy is about 11%. So that's why we're really bookends with each other, Germany and the U.S. Again, the key takeaway here is trying to understand, despite the uncertainty, what can we say, what do we know and what do we not know? Well, one thing we do know is Germany, Mexico, France, Italy, European nations are a lot more vulnerable to uncertainty and trade because they really rely a lot on the global markets to buy their products.

Jeffrey Buchbinder (09:10):

Yeah. So that might suggest that we have more leverage with Europe. You know, we've been saying that for this market to truly put in a durable low, we need to see some better headlines on trade. This would suggest perhaps that we get good news on Europe, right? Maybe they'll be quicker to make a move. They don't want to be seen as rolling over to the Trump administration, but maybe this suggests that there'll be a little quicker to make a deal, whereas India and Japan, or even South Korea, some people have speculated that those would be maybe the some of the first countries to make a deal. Well, they're in a little bit better position, I think.

Jeffrey Roach (09:51):

Yeah, that's right.

Jeffrey Buchbinder (09:52):

How do you think about that?

Jeffrey Roach (09:53):

Yeah, you think about those German and French and Mexican companies, they want unfettered access to U.S. Consumers as much as they can. So that's why I think it's helpful to think they're a lot more interested in having access to us, perhaps, than the U.S. wanting full access to their consumer base. Now, granted, trade is a two-way street, and this is just trade in goods. There's a quite an interesting perspective when you think about trade in not just good services, but where the money flows, where the investment dollars go that's considered the capital account, right? So if you get a little bit deeper in trade theory and talk about a trade balance that's part of the current account, then you got the capital account, the other side of the ledger, as it were, if you're talking accounting,

Jeffrey Buchbinder (10:50):

Yeah, we'll get into the dollar more in a bit. But we always say that the dollar, the currencies go or capital goes where they're treated best, right? And right now, capital's not being treated best in the U.S. So that capital flow has started to reverse. And of course, that's one of the reasons our market's down. One of the reasons our dollar is down as well. So we'll keep following these trade headlines. It's just really hard to know where the off-ramps are. I think it's fair to say the market isn't very excited about the off-ramps that it's seen today. So next up, Jeff, you're just trying to make the point that this type of policy uncertainty is, well, not unprecedented, I guess, in terms of history. The policy uncertainty is different, but what's the same as the market volatility during these periods of policy uncertainty?

Jeffrey Roach (11:45):

Well, that's right. And then another follow up topic to discuss is when you're in the midst of the volatility, it sure doesn't feel good. You feel like, wow, this is unprecedented. And I think this chart helps us realize, well, no, you really can't say that. And in putting into perspective, perhaps it's not quite as bad. So what I have here, just a reminder of the times of 2008, for example. you had Hank Paulson, Tim Geithner, Neel Kashkari, who's now the president of the Minneapolis Fed talking about TARP, Congress, voting on that, and then announcing that to investors. The troubled asset protection plan or relief plan, I think, right? TARP created a lot of week-to-week volatility. And this is what this graph is showing here, S&P 500 week-to-week percent change. We saw that soon after the great financial crisis, 2011, 2012, you saw those spikes.

Jeffrey Roach (12:44):

And then of course, COVID, but really even 2022 had some really volatile times when investors weren't quite sure if we were in recession or not. We had negative GDP prints. Well, that was, turns out be driven by exports and inventories, but the consumer was still spending pretty strong. So just a reminder, liberation day, of course, the week after reversal, or at least a pause, 90-day pause on most of the tariffs, except China, created a lot of volatility. even though it didn't feel good for investors, still not quite the type of volatility we saw when we had a Lehman Brothers scenario during the tarp period. So it's helpful. I know, Jeff, we've done this before as a team, published charts on what the market does, you know, 3, 6, 12 months after a low. I think we can all remember if we were during those times of 2008, 2009, after things shook out, we certainly saw markets recover. And of course, that's important for long-term investors to be reminded of that in the midst of the storm.

Jeffrey Buchbinder (13:59):

Yeah, no doubt. This isn't a bear market yet in the S&P 500, we'll see if it becomes one. A 20% close, you know, down from the previous closing high. But if you do have a bear market, the average one you gain off of those bear market lows is about 40%. Now you have some really extreme V-shaped bottoms. This is probably not that, this is a policy-induced selloff, and this policy can be reversed at any time. So probably wouldn't think of it in terms of a V-shaped or a 40% rebound. It's probably more gonna be more of a grind, maybe a 10 or 15% rally off the bottom. We'll have to see.

Jeffrey Roach (14:47):

Yeah, that's a good point to make is. It's funny when you, well, not funny I should say, but when you think about the volatility in the last several weeks, the analogy would be if Hank Paulson makes an announcement on TARP, and then a week or two later reversed and said, okay, no more TARP, we're reversing that, you know, clearly that's not quite the kind of scenario. I think to your point about trying to anticipate what that recovery might look like. Will it be v-shaped? Probably not.

Jeffrey Buchbinder (15:18):

Right. Well, and by the way, for those who don't know, that Geithner was the treasury secretary after Hank Paulson, and he was during the financial crisis when Hank Paulson was the Treasury secretary. He was the head of the New York Fed.

Jeffrey Roach (15:31):

That's right.

Jeffrey Buchbinder (15:31):

I think I got that right. So there's a nice segue to the Fed, right? So this is the big news of the day. Trump wants to get rid of Powell. The the language is very strong, suggesting that if he sees a path to do this, he might do it. But everything we've read, and I know, Jeff, you were looking at the, what was it? The, the articles, the constitutional I guess amendment, whatever you called it back in 1917 or whenever the Fed was created by Congress. Our best guess is that Powell cannot be removed. So let's just get that right outta there, right out front. He's probably gonna be in his role until May, 2026 when his term ends. But maybe there's, I don't know, maybe it's nuanced. What do you think, Jeff?

Jeffrey Roach (16:29):

Well, you're right. Section 10 of the Federal Reserve Act talks about the removal of a chair for cause. So it has to be a for cause for the President to be able to remove the chair, but it's probably not anything that the president would even want to happen anyway, because there's no winning scenario after he can convince Congress that this is for cause. So I think the two key points that I would make in this is, number one, no surprise that presidents want the Federal Reserve to, if they're gonna do anything to ease up on rates, it's always a lot nicer for the executive branch to have an accommodative monetary policy, because that is going to give the economy the opportunity to expand. And the president and his team certainly want a growing economy, not a shrinking one. So, number one, this is nothing new.

Jeffrey Roach (17:28):

We've seen this with the Greenspan Fed, we've seen it with Bernanki, Yellen, you name it. The president is always gonna have that interest for the Fed, and they're always gonna be trying to convince the committee, the Federal Open Market Committee to ease up. Don't put the brakes on. That's number one. And number two is, I think there is really no positive reason why you'd wanna remove Powell, because if you remove Powell, what are you gonna do next? That in fact, we were talking about that just before the podcast here, Jeff. All right, so let's assume he can do something and remove for cause. Who's he gonna put in? And is he gonna have to do something with the vice chair? He's gonna have to try to, bump Earl other people off to try to replace him with who? Well, who's gonna be overly and ultra accommodative in trying to convince the Fed to do what the president wants?

Jeffrey Roach (18:33):

Now, outside of that argument and scenario building, I think the key takeaway here is inflation's still nagging. We still have challenges on the inflation front, so there's really no reason for the Fed to be aggressive in cutting rates. At least right now, we do think that there is a chance that the Fed cuts by 25 basis points in June, but it's a very slow and steady process to slowly get to the long-term real Fed funds rate. So yes, a cut probably in 2025, but it's not gonna happen at the May meeting.

Jeffrey Buchbinder (19:13):

Yeah, maybe even a couple cuts, right? So Powell himself said, Jeff, that he views tariff-related inflation as transitory, he used that word again. That suggests that the Fed would look through an upward adjustment in prices, 'cause It's a one-time adjustment from the tariffs. And then the inflation from that point forward is what they're really trying to fight. And if the economy weakens, which I mean, I think that's pretty much consensus and unavoidable at this point. Then the Fed probably is too tight here, right? So should get backend loaded cuts. I mean, maybe not more than two. The market here, this is what we're showing is pricing in almost four. And then here we are at 450. So what would that, so that would get rates down to about 350. That might be a little aggressive, but the economic slowdown, you're forecasting it yourself, Jeff, the economic slow down's coming.

Jeffrey Roach (20:13):

Yeah, that's right. So in my mind, it doesn't make complete sense for the president to be attacking Chair Powell because we know that the next decision will be a cut anyway. So it's really just a matter of patience, I think is how I would try to frame it.

Jeffrey Buchbinder (20:31):

Yeah, probably not one of President Trump's strong suits, patience. But if we can all be patient and get through these trade deals and get to a couple of cuts, not to mention the extensions of the Trump tax cuts that we're gonna probably get later this year. All those things can help support this market. But right now it's just really tough. The market is shortsighted. Right now it's tough to see those things. So let's transition to the dollar, which is related to the Fed, of course, Jeff. I mean, I think part of this weakness in the dollar is related to the market pricing in Fed cuts, 'cause Lower rates here mean generally a weaker dollar, but there's a lot more going on than this. You know, you've got the U.S. Exceptionalism bloom coming off the rows. You've got the challenge to the independence of the Fed. That is certainly a problem for the dollar. And it seems like the Trump administration is trying to weaken the dollar to help the trade situation. So your thoughts on where this goes and what it means?

Jeffrey Roach (21:39):

That's right. When you think about it, we were talking about a year or so ago, maybe a little bit more about the fact that the dollar seems to be on the stronger side. We were certainly talking about that and perhaps we're getting what we need, and that is a little softer currency. Now granted, I think one of the things that's pushing it downward in the last, really the last 48 hours, is the fact that we're just seeing so much conflict and strife between Fed policymakers and the executive branch of government. Granted, as we just said just earlier in our previous context of Fed funds rate, it's not really a winning scenario to have this strife brought out back out into the open. You know, can you keep it back behind closed doors? Maybe it would be a request. But we think there is some fundamental reasons why the dollar could come off those really, really strong highs. We just don't like seeing it coming down this quickly. Certainly investors I think in general don't like anything done quickly, right? We don't like to be shocked. We like a smooth and steady process, but certainly the arguments on pushing Chair Powell out is certainly not helping the situation.

Jeffrey Buchbinder (23:05):

Yeah, it is helping gold quite a bit. So if you think this dollar weakness continues, that is one way to play it. And then it also supports international investments for U.S. investors. So, you know, there's correlation between the U.S. and global markets. Of course, there's a limit to how well international equities can do if the U.S. is plummeting, but you do get a little bit of a boost from the weaker currency when you invest in Europe or you invest in Japan. So certainly in general, we like that diversification here and continue to recommend at least a benchmark weighting international equities. So those are probably the big investment takeaways here. But just keep in mind that a disorderly collapse in the dollar is not good for anyone. So we're watching the plumbing of the credit markets to make sure everything is holding up. And, you know, so far it is. This decline is sharp, but it's not disorderly yet. And I suspect given the weakness in the market today that the White House will try to get a positive headline out here before long. So anything else on any of this, Jeff or the economy before we move forward?

Jeffrey Roach (24:25):

That's good. Well, we probably should explain the title, the Death Cross that no one's talking about, including us. We overlooked it here. Did, was that on purpose? Was that a pun that you wanted to play up here?

Jeffrey Buchbinder (24:38):

Yeah, I didn't even talk about it, good point. All I'm saying here is that the 50-day moving average on the DXY index broke below the 200-day which technicians call a death cross. The S&P 500 just had a death cross last week. And that certainly is something that a lot of people are talking about. This one, this death cross. Not so many people are talking about the dollar, but they're not necessarily talking about the death cross. So yeah, thanks for flagging that, Jeff. The dollar technically is very, very weak right now and there's a lot of damage to repair, so it's probably gonna be stuck down here for a while or maybe go lower. All right, so let's transfer or transition to the next segment here, the S&P 500 price target.

Jeffrey Buchbinder (25:28):

A lot of people focus on these quite a bit probably too much because it's really art, not science. And in many years they're pretty useless to be frank, and this year is a perfect example, right? I think 6,800 was around the average, 6,900. Obviously that was terribly wrong. We're not even close. We were more right than that. We were at 6,275 at the low end of our range, but even that is likely to be wrong. So nobody has a crystal ball. It's very difficult to predict this year. Certainly a good example of that. But we're gonna take our best shot here and we'll give you a new range, 5,650 to 5,800 on the S&P at year end. We just shaded, you know, 21 times 270 here in the middle, and then a little bit of movement around that.

Jeffrey Buchbinder (26:28):

That's based on a scenario analysis. So we don't necessarily think that the market is worth 21 times right here, but if you factor in a bull case and a bear case, we think the bull case is a little more likely right now than the bear case. So that justifies maybe a little bit more than 20 on the PE. And so that's two points down, by the way, from where we were. We were at 23 when we set the target originally in December of last year. And then on the earnings side, we set our price target based on 2026 earnings because the market's forward looking. And when you get to the end of this year, the market will be trading on 2026 earnings looking through the windshield, right? Not focused on 2025 earnings in the rear view mirror. So we took that estimate down five bucks from 275 to 270, and that's how you get this roughly 5,700 fair value.

Jeffrey Buchbinder (27:31):

So we're gonna have to do a little work to get there. But we certainly think it's possible. Again, I referenced the tax cuts earlier. The market's gonna be focused on the tax cuts at the end of the year. We'll have some trade deals, we'll have less uncertainty around policy, and then the market will hopefully focus more on artificial intelligence and all of the investment there and the productivity gains, hopefully lower rates and lower inflation expectations embedded in the price to earnings multiple. That all can get you, we think a couple points more than where we are right now. And then here's the scenario analysis we did, and again, we talk about this in the Weekly Market Commentary, putting a little higher probability on the bull case versus the bear case, although certainly the base case obviously is more likely, and this math gets you to 5,728, we can't be that precise.

Jeffrey Buchbinder (28:29):

So we did a range. Hopefully the range is right, but again, this is just so hard to predict. We're assuming that the most adverse tariff scenarios are off the table and that the weighted average rate comes from down from the mid-twenties to maybe the low teens, hopefully 10% or less. And that can support the PE ratio. So 5,700-ish we think is a good place to be at this point based on our best guess as to where this trade situation plays out. So that's that. Going through earnings, earnings season right now, which certainly ties into this chart. So we're at 270 for 2026. Consensus is 303. We know that estimates typically come down a lot during a year. So that would be a lot, it would actually be a little bit more than normal.

Jeffrey Buchbinder (29:31):

Point is that 270 is actually fairly conservative, we think. If we do put a lot of this tariff stuff behind us, again, there can still be tariffs in 2026, but not a hundred plus percent on China, for example, and not 25% on autos. A lot of these rates have to come down, we think. So maybe there's upside to that 270, we'll have to wait and see, but it would certainly be a lot a lot lower than what consensus is modeling right now north of 300. So how does that strike you, Jeff, do you think? Do you think that's reasonable? Anything you would highlight there?

Jeffrey Roach (30:13):

I think that last slide is, is great, Jeff. I love the 21 270 helps our viewers think and really generate their own personal views if they want to. That's a great starting point, understanding where we might be end of the year. We do think, as you said before, Jeff we're eating our spinach before we get to the dessert. We're taking the medicine of the hit from tighter immigration, hit from tariffs. If we get through that, perhaps markets will respond favorably to a better regulatory environment and a better tax environment.

Jeffrey Buchbinder (30:54):

Yeah, good point. 100%. The market valuations anyway, don't like high inflation. They don't like high rates. So the Trump policy, if it all works, it doesn't have to work perfectly, but if it works more than it doesn't work, then we'll probably look at lower inflation by yearend and lower rates. We still think rates come down. I'm talking about the 10-year between now and yearend. A Fed cut or two would certainly help. The economy's probably gonna cooperate by slowing. So you know, that's where we come out with maybe a lower multiple than where we were the last, you know, few months ago, but not too low. Some folks are talking about 18, 16, right on PE we don't think we get down there. Those are recessionary levels and not just recessionary levels, but a recession that actually sticks, right? If we have a recession now, would be policy-induced, and that policy can be reversed quickly. So keep that in mind. Right? All right. So let's transition to the week ahead. I wanna go to you on this, Jeff. What's on the economic calendar that matters here?

Jeffrey Roach (32:12):

Well, this week's not a big one. Like the first week where you get non-farm payrolls or later in the month where you get the Fed's preferred inflation metric from the income and spending reports. This is one of those softer weeks. I think most of it's gonna be really a focus on any potential headlines that might be coming out, any trade negotiation updates, country-specific kind of arrangements that's probably gonna take the center stage. We do have something that's worth reading through on the 23rd. That's the Beige Book. I think the value, of course there is you're getting real time business leaders' commentary on what they're seeing and experiencing at their own individual businesses and those sectors. So it's a good inside look into how things are going. That's probably the biggest one, but it's trade negotiations and earnings. Earnings is your area of expertise.

Jeffrey Buchbinder (33:16):

Yeah. Season is well underway. It's kind of off to a ho hum start. I think we're getting what we thought we'd get generally speaking, which is not a lot of guidance and not a lot of confidence in the outlook. That's no surprise to anybody. I thought it was interesting what United Airlines did. They just gave us a couple scenarios, which is sort of what we're doing with our S&P 500 target, right? You know, what they thought they could do in a bull case, what they thought they could do in more of a bearish outlook for tariffs and trade. So we'll hear more of that, and estimates are gonna come down. But the uncertainty, I mean, it's almost binary, right? With tariffs, bad tariffs or less bad tariffs. Companies just can't give any good guidance and therefore it's gonna be a prolonged period of earnings adjustments.

Jeffrey Buchbinder (34:15):

So we're not gonna be able to have much confidence in the earnings probably until that 90-day pause is over and we start to see, or at some point in the next 90 days, where we start to see some of these trade deals come through. The limited guidance we've gotten has been a little bit more negative than it usually is. Again, that's no surprise to anybody. Maybe the good news is that the financials provided pretty good results. In fact, the average upside surprise for the financials that have reported so far is over 7%. That's actually pretty good by historical standards. So, yeah, it's not all bad. But I mean, even the financials will tell you that they're economically sensitive, of course. So if we stay in this sort of tariff purgatory too long you're gonna start to see the banks earnings estimates come down just like you're gonna see for other cyclical businesses.

Jeffrey Buchbinder (35:14):

So we'll watch we'll be listening for any indications that maybe we can believe in the estimates, but I think we're gonna have to be real patient for that one, just like we have to be patient for the inflation data to come through and start to look better. So I think we'll sign off there. Thanks Jeff for jumping on this week, providing some color on some of these hot topics, especially the Fed, which is getting a lot of attention today. No doubt. We believe in the independence of the Fed and we expect it to be maintained regardless of what you might hear from President Trump. So thanks everybody for listening to another LPL Market Signals. We will be back with you next week. See you then. Take care everybody.