In unpredictable economic times, focus on what you know

U.S. stocks have recovered from the hit they took on “Liberation Day,” as President Donald Trump has scaled back record-setting global tariffs.

But these tariffs are like cotton candy: They’ve mostly dissolved, but the stickiness is still there.

What does the market recovery of the past couple of months really mean? Does it represent the wisdom or the madness of crowds?

Actually, both.

Here are broad statements we have seen with our clients: Trump supporters believe his policies will be good for our economy, and therefore the markets. Opponents view things completely differently, arguing the on-again, off-again trade war will stoke inflation and slow growth.

So let’s look at what we know.

We know the Federal Reserve has not lowered interest rates since December.

We know most of the tax cuts from the 2017 Tax Cuts and Jobs Act are set to expire at the end of the year.

We know Trump has imposed new tariffs.

We know total household debt increased in the first quarter. At the same time, credit card and auto loan balances declined.

That’s what we know. How do we interpret it?

We would expect higher interest rates and tariffs would strengthen the dollar, but the reverse has happened. International stocks have provided far superior returns compared to U.S. stocks, in part due to the dollar’s depreciation.

There could be a few explanations for this. The most likely are a lack of confidence in the U.S. economy and the potentially increasing federal budget deficit, and that tariffs are likely to be reversed and interest rates will fall.

Is it the wisdom of crowds that has caused U.S. markets to rally, or is it the madness of crowds? The bond markets are implying madness.

The “Big Beautiful Bill” the U.S. House recently passed would extend most of the 2017 tax cuts. The Congressional Budget Office and a majority of economists expect these tax cuts to increase the budget deficit, because concomitant spending cuts have not matched the tax-cut extension. Wisdom from these economists, or madness?

There is sniping that these expectations are partisan, but there are 12 states, including Minnesota, with credit ratings higher than the U.S. government. We think it’s likely the bulk of the 2017 tax cuts will stay in place, which has reduced some of the urgency around redrafting estate plans. This should still be closely watched, though, because approval is not guaranteed.

Can we expect credit card and loan balances to continue to decline? Tariffs will initially increase costs to consumers. When you increase friction on the lowest-cost providers — regardless of why their costs are low — costs inexorably rise.

Whether companies attempt to absorb some of these costs (resulting in lower profits) or pass them on to the consumer (resulting in less disposable income), something has to give. The likely effect of these increased costs is less consumer spending and potentially higher unemployment. An increase in costs is inflationary, while lower spending can be deflationary.

How the markets respond will in part depend on the expected duration of these added costs. If auto loan balances decline, it could be because people are buying fewer cars. Is it wisdom or madness to act as if it’s business as usual?

As you make financial planning decisions during these unpredictable times, it’s best to deal with what’s directly in front of you. Rather than guessing what could happen, as important as it will eventually be, focus on what’s happening now.

As the markets rally, use this as an opportunity to get a jump on the cash you need over the next couple of years. Store this cash in online or brokerage high-yield savings accounts that are paying around 4%.

Continue to invest in international stocks and bonds as a way to help insulate you from market volatility.

And know there’s a fine line between wisdom and madness, and we often only know after the fact when we have crossed it.

Ross Levin is the founder of Accredited Investors Wealth Management in Edina. He can be reached at [email protected].

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