This week, the stock markets had one of their largest single-day rallies since 2012, after President Trump suddenly put some of his tariffs on hold for 90 days. He then gave back half of it the following day. Investors wonder if this was a bear market bounce or if it could mean something more.

 

Media sources are crediting the market melt-up to various factors. Some believe Trump decided to soften his stance on tariffs after spending the weekend huddled with his U.S. Treasury Secretary Scott Bessent. Bessent, who the business community believes is a voice of reason in a room full of tariff advocates, had urged the president to pause his reciprocal tariff deadline. He believes foreign nations, given more time, could come to the negotiating table with even better deals benefiting the U.S.

 

He may have a point since few of our trading partners understand the math behind these reciprocal tariffs. Are they about fentanyl, existing tariffs, hidden taxes and other barriers to American imports, their specific trade deficit with the U.S., or all the above? If it is only about reciprocal tariffs, then reducing one's tariff (as Vietnam already offered to do) is simple.

 

It is a different kettle of fish if, instead, Trump is demanding a total reduction of each country's trade deficit with America. That could involve passing legislation to reduce value-added taxes in some cases. In others, it might require far-reaching legislation to undo protectionist measures defending domestic industries for many countries. That would involve developing a consensus among several political parties that share power in governments. It may even require, in some instances, a referendum requiring a popular vote.

 

In any case, before this pause, a growing number of Wall Street research houses were not only ratcheting down their targets for the S&P 500 Index but also raising the probability that Trump's tariff policies could cause a recession this year.

 

Some believe the president was forced to announce a pause in the tariff schedule. Bond traders believed the fixed-income market in the middle of the week was coming unglued. On Wednesday night, the prices of U.S. Treasury bonds plummeted as foreign investors, especially in Japan, were dumping their holdings while the U.S. dollar plummeted.

 

Determining why treasury bonds, a haven in times of distress, experienced such sharp price declines is difficult at best. Who were the sellers? We know China is the second-largest holder of U.S. Treasury bonds after Japan. We also know that the only exception to Trump's reciprocal tariff pause was China. At this point our tariffs on China total 145 percent. China, on the other hand, has moved its U.S. tariff rate to 125 percent.

 

It could be that China is now reducing its holdings of our sovereign debt in response to the U.S. tariff threat. And this China/U.S. tariff war may continue. Charles Gasparino of Fox Business posted on X that the Trump administration is moving toward a possible delisting of Chinese public company shares on U.S. exchanges. If so, Chinese stocks listed here, are ignoring that possibility.

 

A better bet could be that the so-called "yen carry trade" may be unraveling. For decades, traders would borrow yen, exchange yen for dollars, and then invest those dollars into assets that could give them a better return (like U.S. stocks). However, the Japanese stock market has declined along with U.S. markets, while the yen has strengthened considerably against the dollar over the last few weeks. Some clients of large global financial institutions trying to unwind their yen carry trade could be in trouble.

 

How all these variables play out in the stock market is like putting together a jigsaw puzzle with missing pieces. Investors are so focused on this tariff issue that good news, like the cooler-than-expected data from both the Consumer Price Index and Producer Price Index, were largely ignored. So too was the approval of a budget plan in the House that reflects the president's agenda.

 

After this week's monumental bounce, some hopeful bulls believe the bottom is in. Others say that the extraordinary bounce in the averages is a classic sign of a bear market. They point out that if history is any guide, some of the biggest upswings in stocks occur in bear markets. If so, a 10-15 percent spike in the averages could happen at any moment depending on the president's next tweet on Truth Social. To me, until we see a successful conclusion to the tariff issue, which could take several months, I believe any rally would be an ideal time to trim portfolios and get more defensive.  

 

Bill Schmick is the founding partner of Onota Partners, Inc., in the Berkshires. His forecasts and opinions are purely his own and do not necessarily represent the views of Onota Partners Inc. (OPI). None of his commentary is or should be considered investment advice. Direct your inquiries to Bill at 1-413-347-2401 or email him at bill@schmicksretiredinvestor.com.