Asset Returns and UST Update: Pain Matters

We update the YTD asset returns after Day 1 of the tariff binge with much more to come even if Canada and Mexico get dialed back.

Mar 05, 2025

Everybody has a plan until…

We update the running YTD price returns across our usual 32 benchmarks and ETFs set against the backdrop of a lot of commentaries with the phrase “wiped out year-to-date gains.”
As we await more gamesmanship around the magnitude and duration of tariffs, the “national emergency in aisle 3” legal strategy by Trump has allowed tariffs of 25% on Canada and Mexico. The spin that those rates can be adjusted does not change the reality that a fresh wave of tariffs is coming.
In addition to the steel and aluminum tariffs that Trump amped up again under Section 232, we also have other tariffs in the queue such as autos, pharma, semis, copper, and lumber all on the list.
The inevitable clash between the EU and US on tariffs will only be more toxic given the fact that the EU is the #1 trade partner as a block in total trade (imports + exports) and #1 for both exports and imports. The EU in the crosshairs of Tariff Man (who still thinks the selling country pays).
Trump’s behavior of constantly lying about what amount of aid has been provided by Europe vs. the US to Ukraine and his new explicit support of Putin will inevitably color the EU retaliation strategy.

Hailing from Brockton MA, I think back to the boxing picture above when “things happen.” That is based on a Mike Tyson quote (“Everybody has a plan until they get punched in the face”), but no one captures the thought like Rocky Marciano vs. Jersey Joe Walcott.

The consumer is about to be punched in the face. DOGE already kicked some others in the face. Leave it to Musk to fight dirty. No rules.

For the Trump team and the GOP broadly, they will need to be alert to the fact that the tariffs are coming and the population at large will keep learning that the “buyer pays” even if Trump has not mastered the concept and his team refuses to use those words. The Wall Street Journal keeps reminding people, but the facts will show up in the land of economic reality.

The severe stock reaction across the broader indexes are highlighted in the above chart with indexes in negative range YTD through last night close. From the bottom up, the following benchmarks are negative YTD: Russell 2000, NASDAQ, Midcaps, and the S&P 500. What is notable is that all bond ETFs are positive on cyclical anxiety and flight to quality, but we also highlight that many industry groups are doing well.

We see tech leaders and energy sitting in the bottom quartile with the Tech ETF (XLK) just ahead of Transports (XTN) in dead last (the latter is not a vote of cyclical confidence). It is notable that Homebuilders (XHB) are negative even with the recent rally in the UST curve.

The homebuilder caution goes to deeper concerns around the consumer when one considers the very favorable demographic housing demand profiles. The new plan for a fresh spike in lumber tariffs/duties and a range of tariffs on products and materials (notably for the prices and cost across a wide range of downstream applications for steel, aluminum, and copper, etc.) are not helping the outlook for affordable housing.

We see the Consumer Discretionary ETF (XLY) in the bottom tier as discussed in our weekly updates (see Footnotes & Flashbacks: Asset Returns 3-2-25, Mini Market Lookback: Collision Courses ‘R’ Us 3-2-25).

The above covers the timeline for the UST yield deltas from the Friday Feb 21 close to capture a slice of the UST rally.

There are good and bad reasons for UST curve rallies. The above is tied to “bad reasons” as in market anxiety and threat of lower economic activity directly tied to tariff fallout. Watching the PCE and CPI lines remain a key part of the exercise, but lower inflation has not been the driver of lower rates (see PCE Jan 2025: Prices in Check, Income and Outlays Diverge 2-28-25, CPI Jan 2025: Getting Frothy Out There 2-12-25).

Inflation progress will turn into a land war soon (literally in Europe) and not a macro/monetary aerial battle. Stagflation has a more defensible case than it has had since the 1980s. We don’t see that as likely, but stagnation is a greater threat with tariffs. Risk mitigation on inflation comes with the opportunity for oil markets to tank at some point when Trump and Putin consummate their union (even if they decide to “just be friends”).

Oil prices tanking (Russian supply increase) would be a favorable outcome for pushing back on inflation scenarios. The “stag” will still be running loose, but low oil gives a consumer “tax cut” to offset some of the tariff tax increase.

Trump has outlawed calling tariffs a tax, but that was the exact term (border tax) used by Ryan and Brady back in 2017 as they pitched their ill-fated BAT tax. It is clear you can become President by fooling just under half the people just under half the time.

See also:

Happy War on Allies Day 3-4-25

Footnotes & Flashbacks: Credit Markets 3-3-25

Footnotes & Flashbacks: Asset Returns 3-2-25

Footnotes & Flashbacks: State of Yields 3-2-25

Mini Market Lookback: Collision Courses ‘R’ Us 3-2-25

PCE Jan 2025: Prices in Check, Income and Outlays Diverge 2-28-25

Durable Goods Jan25: Waiting Game 2-27-25

GDP 4Q24 Second Estimate: PCE Inflation the Main Event 2-27-25

Tariff links:

Auto Tariffs: Japan, South Korea, and Germany Exposure 2-25-25

Mini Market Lookback: Tariffs + Geopolitics + Human Nature = Risk 2-22-25