Top 10 Trump Tariff Takeaways

Jeffrey Buchbinder (00:00):

Hello everyone, and welcome to the latest LPL Market Signals. Jeff Buchbinder, here your host for this week, with my friend and colleague, Kristian Kerr, LPL's Head of Macro Strategy. Kristian, thank you for joining today. It is Monday, February 3rd, 2025. I guess you could say it's Trade War day as we are recording this, although certainly a very fluid situation. And so we will walk through, so most of the time walking through some of the key takeaways from the tariff situation, work in a little bit of a discussion about U.S. Exceptionalism, and then preview the week ahead as we always do. So, Kristian, welcome. How are you?

Kristian Kerr (00:45):

Hi, good to be here. I'm very good, excited to talk about the tons of things that are going on in the markets right now.

Jeffrey Buchbinder (00:53):

It's a lot. I hope none of you did exhaustive studies of the Mexican tariffs this morning because they were just delayed and may not need that study at all. So let's get into it again. We'll spend most of the time on tariffs. I also wanna mention, I was in Miami this weekend, 80 degrees. So I now that I'm back home with the snow and colder weather here in Boston, I'm wearing a little bit more of a springy sport coat today to try to keep my mind back in the warm, warm weather. So hopefully it's fairly warm where all you are. Here's our agenda, market recap. Of course, we'll be quick with that. 'cause The market really doesn't care that much about what happened last week at this point.

Jeffrey Buchbinder (01:46):

It's all about tariffs. So here you see, we'll do top 10 tariff takeaways. There are probably, we could have done a top 100. None of you would listen that long, but there's just so many elements to this that you could go on all day. We've tried to boil it down into just 10 and give you some of the most important things to think about next. Our weekly commentary on lpl.com is about American Exceptionalism written by our chief economist, Jeffrey Roach with some help. So we're gonna make the case in that piece that American Exceptionalism is not dead. Then we'll finish off with a preview of the week ahead. Of course, it's jobs week. It's really more tariff week than jobs week, but we'll hit 'em both. So Kristian, you know, the last week was really seemingly more about tech weakness than anything else. The S&P 500 down 1%, but if you take out tech, it was actually pretty close to flat. What do you think were the key drivers there?

Kristian Kerr (02:48):

Yeah, I mean, you know, we kind of had very, very similar Monday to today last week, right? But it was that DeepSeek news. You know, it kind of was the market really, really trying to sniff out, you know, how relevant, how important that was. I mean, I think you did see some interesting things kind of underneath the surface in terms of value and growth, and there were some interesting rotations. But you know, all in all, by the end of the week, it seemed, the market had been able to, you know, get through that. And then you know, late in the day on Friday, we started to get these tariff headlines. And, and lo and behold, we have kind of a very similar opening to the week with a little bit of turmoil caused by that. But yeah, I mean, you know, I was thinking that maybe it would take a little bit longer on the DeepSeek kind of reaction from the markets. But it was, it was fairly swift and the markets, you know, handled that really well. And I think you know, I mean, we'll talk a little bit about later in the U.S. exceptionalism piece. But it seems, you know, for the most part you know much more about tariffs now than anything.

Jeffrey Buchbinder (03:55):

Yeah. And we were clearly warned that this was coming many times by Trump and his administration. So it's really not that much of a surprise, although I think some folks were hoping that they would be, you know, watered down, walked back, exceptions, et cetera sooner. So we'll see. But you know, certainly there's a little bit of tariff trade uncertainty, I think in last week's weakness too. Plus with tech, you have chip export controls big losses for Nvidia last week as well as Microsoft, 'cause the market didn't like Microsoft's earnings, which is another reason why we're down so much in tech. Communication services led, certainly strong performance from Meta has been part of that. And you know, turning to international, international has done generally pretty well this year, despite pretty lackluster economic growth and certainly trade risk concerns in Europe.

Jeffrey Buchbinder (05:03):

Tariffs on Europe are probably coming pretty soon as president Trump has indicated here over the last 24 hours. So moving along, oh, and by the way, the economic data was kind of in line mostly, and not really a big market mover last week. The Fed was, as you said last week to me, Kristian, a nothing burger <laugh>, pretty much as expected, not a whole lot of news there. So turning the bond market or the commodities markets. I mean, bonds were strong performers last week. Kristian, I mean, I know we got the Fed's preferred inflation measure, the core PCE, which was decent. What else drove the bond market or the commodity markets last week?

Kristian Kerr (05:50):

Yeah, I mean, I think with bonds or, you know, it's really about short term rates right now. Again, you know, I think we can talk about what happened last week, but really it's gonna be, you know, how does what's going on with the tariffs start to start to impact potential Fed thinking, other central bank thinking with respect to the path of short-term rates. So I think that's gonna be clearly what's driving things now. You know, you can make the case that given this is a little bit, you know, broader reach than people thought that that, you know,, maybe the Fed has you know, a little bit more of a reason to be putting things on hold. So I think we're gonna be kind of sussing that out here over the next over the next week.

Kristian Kerr (06:35):

I think that's really what market's are gonna be caring about in terms of that. And, and I would say, you know, there's been some interesting things going on in commodities. You know, oil's become very correlated with these tariff headlines. What's been going on in the gold in the gold market, you know, probably a little bit too complex to get into here, but some very interesting things is basically there was some front running of potential tariffs by certain, you know, players in the gold market. So moving physical gold from London to New York, and that's been causing you know, a little bit of shortages in London and excess physical here. So it's been very interesting. But gold making new all-time highs last week.

Kristian Kerr (07:19):

You know, I think worth watching very closely. You know, I think we don't talk about it too much, but gold in foreign currency terms, you know, I like gold in euro terms is basically up 50% over the last 12 months, right? So, some interesting things going on with, with the precious metal space that I think, you know, continues to be worth watching. And then of course, you know, I'll just front run, you go in that foreign exchange, but I think foreign exchange has been probably the most focused on what's going on with tariffs, because, you know, arguably they're the most directly impacted. Because what tends to happen is, you know, if you slap a tariff on somebody, what are they gonna do? They're gonna readjust their exchange rate to take in that account, right?

Kristian Kerr (08:04):

So, you know, you slap a 10% tariff and I'm gonna move my currency down by 10% or what it is. So we've been seeing kind of the, the markets for really for the last two months really focused on that and the effects market. And you know, we've seen this morning you know, some, some pretty big gap ups in the U.S. Dollar versus, you know, obviously we had one against you know, pretty big one against the Canadian dollar you know, against the peso, which came all the way back when that announcement came out, that the tariffs' being delayed. But I think the FX markets are arguably where you see the most direct impact from these types of announcements.

Jeffrey Buchbinder (08:41):

Sure. That's right. And you also see, you know, the markets start to price in just less goods flowing across the borders, and that's affecting some of the transport names too. So we'll get to more about industries and sectors in a little bit, but certainly transports are an area that's struggling a little bit today. So thanks for that. Kristian. you know, here's the S&P 500 chart. This factors in this morning's losses. So you see 59 30, so we've broken a little bit below the 50-day, the 20-day, and the 50-day moving averages, but we still got a fair amount of cushion before we test the 200-day 56, 34. So that would be another 300 points down on the S&P 500. I've said it a number of times, we'll test the 200-day at some point, but it's just, I thought it would've already happened by now.

Jeffrey Buchbinder (09:30):

I've been talking about that for a few months. But you know, we'll wait and see just how long these tariffs are left in place or how much they're ratcheted higher and how many exceptions there are, right? Those are, I'd say, are some of the key factors that will determine just how much stock market weakness we get. And then that, of course, will determine how, how quickly we do bounce off of the 200-day moving average. We'll get there eventually. It's just math, but got a good bit of cushion. We're still in an uptrend. The breath metrics aren't bad at all. You know, there's winners and losers, you know, steel stocks doing well on the tariff protection, for example. So you know, this metric of 62% of stocks in the S&P above their two-day moving average probably is gonna hold up okay, which is good.

Jeffrey Buchbinder (10:20):

It's not a great breadth reading, but it's a decent one. So 10-year yield. Here I'll bring you in Kristian on what you, you think of the 10 year, I know you're gonna bring in tariffs again, but if we think, you know, if the Fed cuts twice more, which is still our base case, there's more uncertainty around that base case. But if they cut twice more and tariffs cause a little retaliation from our trading partners, which has already been announced in Canada, and which is, you know, planned in Mexico if needed, that slows economic growth, right? And that in turn, puts downward pressure on rates. So even though you might have a little more inflation from tariffs, you're also gonna have downward pressure on growth, and you'll probably have a Fed, maybe they won't cut in the next six months, but you'll have a Fed eventually that's probably gonna cut ahead of that growth slide. What do you think?

Kristian Kerr (11:15):

Yeah, I mean, I think things are kind of following the path we kind of outlined in our, in our yearly outlook, right? Where, you know, you get to the higher levels and you know, closer to 5%, you start seeing pressure to, you know, on yields lower, and you start getting kind of the lower levels, you see pressures for yields to start moving back up. So I think we're seeing that, that play out. I think, you know, we also talked about the potential for hiccups on inflation concerns, which you get that with the tariff policy. And\you know, I agree with what you say, I think we'll probably end up you know, there's room to cut more, and it's just the path to get there is not gonna be as linear, I think, as the markets were thinking they would be at the start of the year.

Kristian Kerr (11:56):

And we're kind of seeing that play out. But you know, I think the other big thing with the fixed income markets is just, you know, it was interesting that when the, when the headlines came out, you know, there was kind of a move into bonds, right? So I think it goes kind of back to what Lawrence was saying in the Outlook as well, that, you know, in bigger periods of risk off you can expect bonds to still act as a potential, you know, natural hedge to equity weakness and kind of more the little, you know, the little smaller moves. It doesn't do that as much. But I think that's another big factor. If we were to get, you know, let's say things escalate a little bit more you know, you'd expect bonds to start kind of having that natural hedge aspect to them too from a, you know, asset allocation perspective.

Kristian Kerr (12:41):

So a lot of things to watch. But, you know, I think in the near term, so putting on your, kinda your short term trader's cap, it's gonna be very much about trying to figure out, you know, what the market's gonna be thinking about. All right? You know, how aggressive is the Fed going to be able to be here with this going on? You know, I'd also think kind of rates outside the United States are gonna be very interesting. You know, you have the ECB just cut you know, kind of been talking about a path to lower rates, which markets have been expecting, you know, how does this impact what they're gonna do? Particularly, you know, again, going back to the foreign exchange side, if they start kind of tweaking FX rates there, you know, does that end up shifting what they do with rates? So there's gonna be a lot of question marks with what's going on around, around the near-term path of rates. But I think, you know, ultimately the path to get there won't be as linear as everybody thinks, but we'll probably still kind of make our way to those two cuts in the U.S. At least by the third or fourth quarter.

Jeffrey Buchbinder (13:44):

Completely agree. Probably back loaded. Yeah. So thanks for that, Kristian. Let's move on. I mean, we know we're gonna talk tariffs a lot here, so we already have. It's a bull market and uncertainty, certainly. So I've got 10 takeaways. I'll just read five at a time. I put five on each slide. And then Kristian, I'll have you comment on, you know, any and all of these. So number one, timing and duration remain uncertain. So don't overreact. I've already been asked, should I buy the dip today, <laugh>, right? And I'm sure many of you're thinking that, well, this isn't even really a dip yet, that this market, the S&P 500's, not hardly down 2% from peak. So you know, we don't really call anything a dip until it gets to 5%. Probably we'll get a 5% dip at some point fairly soon, given all this uncertainty.

Jeffrey Buchbinder (14:40):

And given that this looks like a real shift in policy, not Trump 1.0, but we'll just have to wait and see, we certainly wouldn't overreact. You learn that with the Mexico news today, right? Things change fast. Number two: tariffs on North American trading partners are a negotiation, right? So we already negotiated with Mexico, they're sending 10,000 troops to the border, and therefore tariffs delayed. This is the carrot and the stick that is the same in Canada. We will get some sort of concession, most likely from them. Those tariffs will be delayed or removed completely at some point. Now, some of this is related to a long-term shift in trade deficits. So you may see some of these tariffs remain in place permanently, even with our friends in Canada and in in Mexico. So that's an important caveat. Number three, tariffs will not fully tariff costs will not fully be borne by consumers, right?

Jeffrey Buchbinder (15:41):

Kristian, you mentioned one reason why this is the case because currencies are gonna adjust. Another reason why the wholesalers, the companies will absorb some of these costs. So just because there's a 25% tariff potentially on avocados from Mexico, that does not mean that the prices of avocados will go up 25%. They'll go up much less than that. They will go up, but they won't go up 25%. So keep that in mind. That's good for inflation. Inflation will go up, but not much. And it probably won't be sustained in many of these cases. Number four: I have a chart of this. U.S. has limited revenue exposure to Canada, China, and Mexico. In fact, I've seen one estimate it's only 7% of the S&P 500 revenues are from those three countries. So, this is really about costs.

Jeffrey Buchbinder (16:33):

It's kind of like the COVID supply shock, right? You just have to spend a lot more for stuff. And then in turn you see prices go up. This is not so much about the retaliation because we don't have to buy so much Mexican imported beer. We can drink the beer here, and the revenue in the S&P 500 from Mexican beer or avocados, <laugh>, it's pretty low. China, it's a bigger deal. Of course, we have a little more revenue with China than we do with Mexico, and I think Canada as well. So, last one on this slide, and then I'll go to you, Kristian. Overall impact on economic growth and the S&P 500's profits likely to be limited. So part of this is around the fact that we don't import everything from just these trading partners.

Jeffrey Buchbinder (17:32):

Part of this is related to the fact that we make stuff here, a lot of it, right? So we're only talking about some costs for some of the inputs to find, you know, finished goods or in some cases we import the finished goods. We're only talking about a portion of that, right? We're talking about, I think the number is somewhere around 900 million in imports from Mexico and Canada, just to focus on those two. So you know, the impact, I've seen a lot of estimates, maybe we're talking about a half a percent hit to GDP, maybe a little more if all this sticks, and maybe we're talking about, you know, I think reality two points of S&P 500 profits by the end of the year could be a little bigger than that depending on if all of these stick. I've seen forecasts as high as 7, 8% hit to S&P 500 profits. I just don't think all these tariffs are going to stick throughout the year. And you know, that's why I think we would caution folks about being too negative on the hit to profits. So I'll stop there, Kristian, and have you weigh in on any of these that you want.

Kristian Kerr (18:44):

Yeah, yeah, I'll, you know, start or look at two, and I guess one by extension, but really, that's the crux of the matter here, whether, you know, how impactful this is gonna be. Because I think there's a lot of, you know, the majority of people in the market right now think that this is really just a negotiation tactic by the Trump administration to try to achieve certain parts of their certain objectives of theirs, right? And we saw that today with Mexico, where the kind of clear thing was to deal with the border situation. Obviously the negotiations of a phone call went well to where, you know, they were starting to get progress on that. And lo and behold, the tariffs got pushed back a month.

Kristian Kerr (19:30):

You know, I think with the Canadian situation, it's about if you listen to the lawmakers, and particularly within the Trump administration you know, people like Lunik have said, you know, it's really about getting the Canadians to pay more in terms of military spending. So that's a much more complex thing to iron out than sending troops to the border. But I think bottom line there, what we're just trying to point out is that that's probably what this is, right? It's not anything more you know, a bigger picture deal, assuming that is what it is, right? I think where it gets a little bit more difficult from the market standpoint is if we start getting in a scenario where it starts becoming okay, broad reaching. It doesn't matter what country has tariffs, it's gonna be, you know, anyone who imports the U.S. and that's a little bit more tricky for the markets, right?

Kristian Kerr (20:29):

'Cause then that starts to change the game dynamically from an economic standpoint. So I think we're all trying to kind of suss through that right now, but it seems, I think the market thinks that right now this is really just about Trump starting from the Trump administration starting from a certain level to try to get certain policy objectives. And then it's a little bit of back and forth and then, you know, hopefully these things kind of start to go away as the objectives are reached. So that's gonna be important. You know, definitely the market's got a little carrot this morning with the Mexico news, and we'll see how things go on the Canadian side, you know, a little trickier there because certain politicians within Canada are, are kind of using this to their advantage to try to talk tough in response to the U.S.

Kristian Kerr (21:19):

So whenever you start getting that kind of tit for tat you know, things can happen, right? So it's something to be on the lookout for. But I think ultimately, you know, everyone's trying to come to the table and figure out how to best proceed with this. So as long as that's what it is, and the market perceives that's what it is, I think the impacts could be relatively limited. So, you know, hopefully that's the case. I think it's a little more difficult with China, and I think that's why the administration started with a lower number there, 'cause those probably will be tariffs that are in place for a longer time 'cause those really are, you know, they're bigger issues.

Kristian Kerr (21:58):

They're bigger policy objectives that the administration is trying to deal with there. So, I think they started small. And it seems, from what we've seen so far you know, the Chinese government is already starting to come to the negotiation table and start talking about ways to move forward on this. So,, as far as this thing could go, if you told me that what the headlines would be a week ago, that they were gonna be this I think things aren't as bad as they as they could have been, now that we're here in the midst of it,

Jeffrey Buchbinder (22:33):

Yeah, I think markets have held up well, in part because people thought this was, you know, a stick that would turn into a carrot <laugh>. Yeah, for the most part, China's a little tougher, and you've seen some meaningful weakness in semina, you know, the NVIDIAs and on down the line. Clearly part of that is related to the China AI advancements, but it's also related to export controls, national security issues. And you know, that points to maybe a tariff, like you said, that's gonna stick. So we'll have to watch that closely. So here's our next five. We already alluded to two Fed rate cuts still being on the table. We think that is the case. Again, as these tariffs help or, I mean, we want that, we want the economy to slow a little bit, to put less pressure on inflation, right?

Jeffrey Buchbinder (23:26):

So this isn't a bad thing, but as the economy slows and puts less pressure on inflation, part of that slowing growth is gonna be related to tariffs, presumably, especially if we get tit for tat with China, might even get a little bit of that. We hope we don't might get a little bit of that from from Canada and Mexico as well. That increases the chances that we get two Fed rate hits. This year, the market expectations are 1.7. They haven't really changed. The two-year yield's up a little. So yes, they have the chances of one cut are up a smidge today, but not meaningfully. And the 10-year yield is down a tad. So bond market's taken this in stride. Number seven, tariffs and strong dollar to weigh on emerging markets. So this gets more into asset allocation, of course.

Jeffrey Buchbinder (24:16):

China drives the bus for emerging markets, and the risk of investing in China has just increased. They also got some weak economic data over the weekend. By the way, we already knew the Chinese economy was struggling. We're getting more evidence of that. So in terms of the EM index, we think the outlook as a result of this is weaker, not just tariffs. Also, the currency strength in the U.S. Dollar number eight, domestic sectors are relatively more insulated. So financials could be potentially a relative winner here because they're, you know, a lot of these regional banks, certainly, I mean, pretty much all sectors except utilities and real estate have a meaningful global footprint. So there aren't too many places to hide here, but financials may be a relative place to hide. And I think even, you know, maybe healthcare is a relative place to hide.

Jeffrey Buchbinder (25:18):

Maybe Kristian, you can add to that list here in a minute. Market cap point number nine, effects on small caps may be more limited. So you're more exposed to tariffs if you're importing more as a company, right? So it makes sense that a more domestic, smaller cap company would have less tariff exposure. They tend to sell less outside the U.S. And they tend to source more, have less complex supply chain source more in the U.S. So there, there are a lot of factors here to consider when you're trying to assess large caps versus small caps. But when you look at just tariff and trade risk, small cap's a little more insulated. And then finally, number 10. I thought this was a good one to end the list with. Trump cares about the stock market. It's kind of like people talk about the bond vigilantes.

Jeffrey Buchbinder (26:10):

If you spend too much, if the deficits, it goes too much above where it is, you're gonna actually, the deficit should come down. Bond vigilantes come in, right? And they sell treasuries. Collectively they influence the bond market yields go up, and that forces action for the federal government to spend less. It's the same thing here. The market throws a big temper tantrum. Certainly President Trump does not like that. He views the market as somewhat of a report card, and that could speed up reversals. I don't know if it had anything to do with Mexico, maybe not, but certainly if he is too aggressive, there is a point, and he's said this himself, there is a point where the market is too weak and he backtracks. So over to you Kristian, comment on any of those.

Kristian Kerr (27:03):

Yeah, well, there's that old saying, right? Like markets stop panicking when policymakers start to panic, right? Which is basically when they start hearing the market's message, that's what markets tend to like. So I, you know, I think that's clearly important. I think you know, he walked back some comments that he made, I think on Friday afternoon about, you know, not really caring about what the markets do, and kind of walked that back over the weekend. So that was all in all a net positive. From you know, from a market standpoint you know, a few things. I mean, I think on the, you know, the dollar's important, right? We know we've touched upon this, but just FX is so directly impacted by tariffs. You know, I think over the next few days, it's gonna be really interesting to watch what happens in China because they're basically closed for the lunar new year.

Kristian Kerr (27:53):

So, you know, we're not really getting the FX reaction you would expect after this announcement, because, you know, not to get too in deep in the weeds on how it works, but, they have a managed currency there. So you know, the CNY and it's done by this basket. And and basically with everything closed, you know, they aren't as active in that right now. So markets are looking for kind of later in the week to get the real response. I think that's gonna be important. But bigger picture from an investment asset allocation standpoint, you know, at the index level, emerging market indexes have a very hard time outperforming when they have a strong dollar headwind you know, like the time typically to that EM does really, really well is when the dollar is weakening, right?

Kristian Kerr (28:43):

Because you have that tailwind behind you. So again, with countries, they're kind of the easiest and the easiest tool in their tool bag when, when they get slapped a tariff is to just literally, you know, take down the exchange rate in response to that. And also the fact that, you know, I think as you mentioned, Jeff, when you have higher tariffs, there's a little bit less trade out there, a little bit less supply of dollars, less supply tends to see a currency go up. So I think all those factors are gonna be really, really, really interesting here. And I think kind of net, net mean that you know, EM as an outperformer is gonna be like really, really tough in this environment unless we just get radical, you know, clear transparency on what's going on here in terms of, you know, it just could be a select few countries that are tagged with tariffs and things like that, which doesn't seem the case, at least for the for the moment.

Kristian Kerr (29:41):

But kind of, you know, things to think about, I think in the end, in the interim. And let's see, what else? Yeah, I mean, I think on the rate cuts, you know, we've talked a little bit about that. You know, obviously this puts a little bit of uncertainty there for the Fed, but ultimately they, you know, they have room. It's just, you know, I think it won't be a, you know, probably gets bits, gets back half there in terms of when the Fed bill feels more comfortable after they've kind of seen the impacts of these things on the economy and get more clarity. So, you know, that's ultimately a good thing too, 'cause you know, I think kind of where, how the markets were, you know, how many cuts they were pricing in to start the year, you know, particularly in the back half of last year, it was just unrealistic. So this almost kind of pulls attention, focus back to I think a little bit more realistic kind of end target for the Fed in terms of this rate cutting campaign. So better for markets to price that in now, adjust earlier for it. So, you know, again, net, net could be some positives here from all this in kind of the broader scheme of things.

Jeffrey Buchbinder (30:51):

Yeah, good stuff. So I think you know, autos is kind of where everybody goes first, right? There's a ton of exposure to Mexico and Canada and the auto industry. So it should certainly, you know, point that one out. Those are some of the biggest movers today. I mentioned railroads earlier. There's certainly retail exposure companies, you know, apparel, you're importing a lot from China. So certainly that group is seeing some volatility here. And then I mentioned food. Certainly the food sector or food industry group within the consumer staples sector is seeing a little bit of volatility today. Oh, and then avocados outta Mexico, certainly there are Mexican restaurants in the U.S. that are gonna see their costs go up. So you're seeing some volatility in that space, which of course is led by Chipotle. So I got a few charts here on the trade situation.

Jeffrey Buchbinder (31:46):

I'll be really quick with these, and then we'll get to the American Exceptionalism and we'll wrap. So much to talk about. So this is just an index of trade policy uncertainty. It's essentially, you know, counting words from media reports. And you see here we're almost back to peak trade uncertainty where we were in 2019 when you know, Trump 1.0 tariffs went into effect. These tariffs are bigger. Actually, I think it's about four x if you take out, it depends what you do with Mexico. Four to five X is big because they're broad, right? Relative to 2019. But in 2019, we hadn't seen this before, so uncertainty was higher as we were all trying to understand. Now we kind of have a playbook. So high uncertainty, but a little less uncertainty than we had before. I thought this was interesting. This is revenue exposure by geography for the S&P 500.

Jeffrey Buchbinder (32:40):

Thank you to Goldman for doing their math on this so I didn't have to. Not every company reports all of their revenue by geography, but most of them do. So this is a pretty good look. And you see 72% in the U.S. In Latin America, which obviously includes Mexico, you've only got 1%. So hardly anything. Other North America, which obviously in Canada, 3%, we don't sell a ton of stuff in Canada. That's one of the reasons why the Trump administration is doing what they're doing. They want more balanced trade. But this is good news for the S&P 500 selling into Canada, that's not gonna really have any impact at all. And then China, Asia-Pacific is 8% of revenue, but that includes Japan. So there's a lot of revenue in Japan outta that chunk. So the direct China revenue, where we're selling into China, Apple's certainly a big player there. That is not a huge piece. Again, this is more about costs for U.S. companies doing business overseas than it is about revenue. So next inflation here. Kristian, thoughts on how inflationary tariffs are? I mean, if, if the world looks like you think it's gonna look, how much of a boost to inflation is that, and how long would it be sustained?

Kristian Kerr (33:56):

Yeah, it's tough to handicap when you don't have all the details, but I think

Jeffrey Buchbinder (34:02):

It's fluid.

Kristian Kerr (34:03):

Yeah, yeah. You know, but I think now, given how limited the scope is, you know, it's fairly minimal. You know, I've seen, you know, fairly, the estimates that there are fairly low. It's just the knock-on effects that's the reality, right? So if you start getting, you know, stronger dollar, you know, you start seeing companies, maybe even front loading, you know, potential kind of raises to, you know, passing onto the consumer and prices there, you know, how do you gauge that? So, I don't wanna go out there and put a number that's, that's Dr. Roach's job, but you know, and

Jeffrey Buchbinder (34:45):

It's impossible with information we have

Kristian Kerr (34:48):

<Laugh>. Yeah, yeah, yeah. Precisely. You know, I think that the keeping the note here though is just that, you know, there is that potential for hiccups, right? Because there's, you know, it's something we haven't seen as you've noted in years. And,I think these are the highest tariffs since Smoot-Hawley in the thirties, right? So you're talking, you know, a regime that no one really knows. And, you know, as you said in the Outlook, right? You know, we expect to see hiccups this year in terms of if trade becomes an issue, then that's gonna naturally kind of force people to start thinking about potential you know, higher levels of inflation out there. You know, I think in the end it won't be as bad as people think. But that potential to see little hiccups between you know, now and finding other details, I think is definitely a real possibility the market's gonna be dealing with, with you know, and as we said, it's gonna impact, you know, the path on rates you know, might not affect the end number that we do, but the path to get there will, will change. And that's just gonna be a, you know, a fact of the matter. What this brings to the table.

Jeffrey Buchbinder (35:53):

Yeah. The Canadian energy tariffs are being felt in markets with higher energy prices that certainly can influence inflation expectations. So hopefully those will come off.

Kristian Kerr (36:05):

I will say too, I mean, the other key thing is listen, Trump you know, a big reason that he was a able to win was inflation, right? So, you know, politically, he does not wanna see inflation start to get too high. So, you know, he can pull back on the reins if he feels that's starting to happen, right? You know, again, it's one of these things that, you know, if you let the kind of cat outta the bag and you control it, that remains to be seen. But I mean, in the end I don't think he wants to see, he doesn't wanna get labeled with that going into midterm. So, I think there's that push pull dynamic here with respect to inflation and him in the administration. I know how far they wanna press some of these initiatives.

Jeffrey Buchbinder (36:51):

Yeah, good point. Here's the U.S. Dollar chart. You mentioned, Kristian, that FX is really the center of this. The dollar is right back near its recent highs, right around 109, 110. Technically speaking, if we break through this level, which decent chance we do, then you make a run at like 114, you know, on this chart, one kinda that one 12 to one 14 range. So this is a very bullish chart for the U.S. Dollar. It's not even overbought yet on the RSI 14. So you know, again, influences earnings for multinationals doing business overseas. Stronger dollar means those profits translate into those foreign currency profits translate into fewer dollar profits. And then U.S. investors get less return because they have to translate their international returns into U.S. Dollars.

Jeffrey Buchbinder (37:50):

So the dollar's vitally, vitally important and it tightens financial conditions. So, when you see these forecasters, I'm sure they're all over the media today, trying to assess the economic impact and the market impact of tariffs, you always have to consider that tighter financial conditions related to the tariff news will slow the economy and potentially negatively impact capital markets. It's not just the tariffs themselves. So let's turn to American Exceptionalism. Kristian, again, the Weekly Market Commentary, which you can find on lpl.com. We make the case that American Exceptionalism is intact. So here's a few reasons why. So first, this is a measure of innovation. You know, part of this is R and D spending and you know, part of it is tech startups and things like that. And so, Bloomberg has put together, there's a list here on this slide for those of you who are watching, of some of the things that are in here. Manufacturing value added number of public companies as a share of the total, high tech public company, universe, post-secondary education all of these sorts of things.

Jeffrey Buchbinder (39:03):

So you put all that together and our innovation is continuing to rise, and we think it will continue. We have the entrepreneurial advantage. We have the R and D spending advantage, and we have a currency advantage which, you know, effectively keeps the U.S. Dollar as the global reserve currency. U.S. Dollar is about, this shows that U.S. dollar is about half of all global transactions. Certainly, the Euro has a big chunk too, but you know, we are the leader, and this isn't going away anytime soon. So that helps. Essentially, just to put it simply, kind of fund our exceptionalism in our innovation. And we also have a lot of global market cap. So this just shows we're not only, we're about half the global currency transactions in the U.S. dollar, but about half of the global market cap is in the U.S. and certainly that has been moving higher here recently. So, all of those factors we think keeps us in the lead. So, Kristian anything to add there?

Kristian Kerr (40:15):

No, I think it's a great point on, you know, being the reserve currency comes with a great privilege, right? But as long as that's not threatened, you know, I think the U.S. Exceptionalism story continues, right? It's kind of a natural aspect of that. You know, like all this stuff we've talked about with tariffs, it's because the dollar's reserve currency that has this global impact. So, you know, I think there's a lot of talk out there always about, you know, is the reserve currency status coming to an end? You know, we don't think that's the case whatsoever. And clearly kind of a lot of the charts you show that is the case, but I think that's one of the underpinnings to the exceptionalism story. And then you add in things like what's going on in AI and kind of the leadership the U.S. has in tech, and it just seems like a very, very powerful unstoppable trend for the for the intermediate term.

Jeffrey Buchbinder (41:16):

Yeah, agree 100%. And markets are reflecting that with, you know, continued strong performance from the AI complex, you know, China's DeepSeek found a clever shortcut and probably accelerates global innovation in terms of use of power and how many data centers we have to build and things like that. We'll see, but we're still gonna be the leaders there. So thanks for that, Kristian. Let's go to the week ahead real fast. It's gonna be a lot of tariff talk, probably more than anything else, but we do have the jobs report consensus, 170 you know, that this is gonna include some effects of the tragic California wildfires. So I don't know how that should probably take job ads down a bit. That's really my only thought there. Anything to add either to that Kristian or any other data that you think is meaningful to watch this week?

Kristian Kerr (42:11):

Yeah, yeah. I think with what's going on, you know, it's one of those rare events where payrolls and unemployment won't be as impactful as it would've been had this not happened this week. You know, that's the real takeaway. It's that usually that is kind of one of the big days of the month, you know, still being important. You know, obviously it's a very big barometer, key metric for the Fed, but I just think given what's going on with the with the T word this week, you know, it's just not gonna have the market impact that it normally would. And that's probably the key thing to highlight there.

Jeffrey Buchbinder (42:47):

Yeah, the ISM data this morning was actually quite strong. So yeah, I think we've got a little bit of a cushion. You know, when you raise rates a bunch, you can then cut 'em when you have a stable and strong economy on, I mean, a solid footing. If it slows a little bit, that's fine. And I think that's probably all we need to say there. Oh, it's a big earnings week too. And so it'll be interesting to hear what companies have to say about tariffs. You're gonna get a lot of vague, you know, 'the situation's fluid' kind of commentary. But from some companies that are more directly hit, you'll probably get a little more than that. So I think it's 131 S&P 500 companies that report this week. That is a big, big, big number including Amazon and Alphabet slash Google from the Mag Seven. So certainly we'll be watching those as well. But really, it's all about tariffs. So we'll stop there. Went a little long today, but there's just so much talk about we think it made sense. So thanks Kristian for joining this week. Thanks to all of you for listening to another LPL Market Signals. We'll be back with you next week. See you then.

Kristian Kerr (43:53):

See you later.