Analyst: “Cavalry is not coming to the rescue”

With stocks seemingly set for a fifth-straight day of volatility since President Trump’s Rose Garden tariff announcement, we had a quick chat with Steve Sosnick, chief strategist at Interactive Brokers, about what, if anything, could quell the sell-off.

Describing the Trump tariffs as a “bombshell,” Sosnick said it’s difficult to find a good historical analogy for the shock of Trump’s proposition to return US trade barriers to levels that some experts say were last seen before World War I.

The issue, at its core, is that the tariffs seem to be simultaneously inflationary — likely to raise the price of goods Americans buy — and recessionary, as the disruptions and sharp increase in what are effectively import taxes are expected to drive down economic activity, prompt corporations to delay or abandon investment projects, and raise unemployment.

“In some ways Covid fits the bill, in the sense that we got this huge exogenous shock that rippled through the system very quickly,” Sosnick said, adding that there are also big differences that matter a lot to the markets.

His thoughts are worth quoting in full, with some edits for clarity and concision.

“The reason that markets did very well, even with the disruptions that were caused by Covid, was that the Fed was able to cut rates down to zero and massively expand their balance sheet, while at the same time, there was a huge fiscal response, right? The stimulus checks, among other things.

Neither of those responses is going to happen now, because the federal government is actively trying to shrink. So you’re not going to get fiscal expansion. As a matter of fact, the fiscal side is working in reverse. So that’s not going happen.

The Fed, yes, if things get bad enough, the Fed is likely to change policy, but they’re not going to do it preemptively, because Powell has told us enough times that they don’t know what this is going to do in terms of price and output... he knows it’s likely to raise prices and impede output, but does he want to be cutting rates at the same time that we may be creating a lot of inflation as a result of tariffs?

Until or unless the rest of the economy gets so bad that the Fed is forced to move... the cavalry is not coming to the rescue here.”

So what could credibly stop the pain?

“The market doesn't know where to look for relief,” he said. “Realistically, the only true relief would come from some sort of easing of these tariffs.”