As many people have noticed and commented on, markets have recovered all the losses from “Liberation Day”. In some ways, this is very rational. Trump just showed tariffs was just a negotiating tactic. What tariffs if any will remain in the end is very unknown - but the political aim for Trump is for other nations to spend more and to buy more American products - which is bullish for US. So any trade that was a bet on recession has been a losing trade. A good way of seeing this is the value of leveraged loans. As it is capped at par (100) market is very risk adverse if they get anywhere near 90.
The same with corporate spreads - they barely widened and then came back to near all time lows.
What is clear to me is that the market expects either the Fed or the government to act to overcome any market or economic weakness. The problem is that the US consumer has also woken up to the fact that recessions are now unlikely. Despite low energy prices, US inflation expectations are very elevated.
From 2000 onward, US fiscal and monetary policy has become more and more reckless, and yet the bond bull market continued. This has created a view that deficits do not matter, and in both Trump administrations, and Biden’s Presidency - we saw fiscal deficits expand to ever higher levels. But we now see that long dated bond markets ARE reacting to US policy. 30 year Treasury yields are at nearly 20 year highs. The reasons for this are varied, but long term. I see no reason to expect a bond bull market to start again.
So what I am seeing is that equities are trading in a past that is no long valid. What I am looking for is longs that do well as yields go higher, and shorts that make money when rates go higher.
