Hope you are all doing well. The major U.S. stock indexes recovered most of the ground they lost the previous week. The NASDAQ finished 1.5% higher. That snapped a string of five consecutive weekly declines. The S&P 500 gained 1.1%, and the Dow added 0.3%. Robert Duvall passed away this week. I broke down this week’s update using quotes from his iconic Tom Hagen character in the Godfather movies.
“Mr. Corleone is a man who insists on hearing bad news at once.” – Robert Duvall
President Trump got bad news on Friday. A 6-3 decision, the U.S. Supreme Court ruled that his administration exceeded its authority under the International Emergency Economic Powers Act (IEEPA). The President reacted immediately (unlike the Godfather, no horses were harmed), and he immediately held a press conference. He outlined the next steps his administration will pursue to replace the repealed tariffs. He stated that a 10% tariff will be placed on all trading partners under Section 122 (international payments problems) of the Trade Act of 1974. These tariffs don’t require a federal investigation and can be imposed immediately, but only for up to 150 days. An extension beyond 150 days requires Congressional approval. He can’t raise the tariff above 15,% which he must have been told after the press conference, because he raised the tariff to 15% on Saturday, effective immediately. What this move does is it buys him time to pursue the sections of the Trade Act that require investigation. Going forward, look for them to use Section 301 (discrimination against US Business) or Section 232 (threat to national security) to implement tariffs going forward. Both require investigation by federal agencies. 301 is investigated by the US trade representative, and 232 by the Commerce Department. One thing the ruling failed to do was resolve whether the government must repay the 175 billion dollars of tariff revenue that it has already collected. That has been left to the lower courts. The markets reacted favorably on Friday. Ultimately, I don’t think the decision moves the needle either way in terms of the direction for stocks.
“Now, you owe your Don a service. He does not doubt that you will repay him.” – Robert Duvall
Private credit has rewarded investors, but as default risk rises, investors are trying to collect on some of those gains. Shares in Blue Owl Capital fell nearly 6% on Thursday after the money manager suspended redemptions and sold $1.4 billion of loan assets held in three of its private debt funds. The biggest portion of the sale came from a semi-liquid private credit fund. Private credit is not something most of you are invested in. It is something a lot of insurance companies are invested in. I mention it because insurers are rightfully cautious when they see a potential risk coming. Usually, that means scaling back some of the incentives they are offering on new contracts. I would not be surprised if we see a wave of rate reductions. Over the past 3 years, we have seen some of the most generous fixed and fixed index annuity rates ever offered. Locking in those terms now, before they change, could make sense.
“Is it worth it? I mean, you’ve won. You want to wipe everybody out?” – Robert Duvall
Republicans should have been taking a victory lap after the economy won big in the third quarter last year. Instead, they chose to take a hardline with Democrats as the two parties went to the mattresses during a prolonged government shutdown. As a result, our economy expanded at a slower pace than expected. GDP grew at an annualized rate of 1.4% in the fourth quarter. That came in below economists’ consensus estimate of roughly 2.5% growth and way behind the third quarter’s 4.4% rate. The number should still be interpreted as positive. That’s because the economy finished with growth despite a massive decline in federal spending, largely due to the government shutdown.
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