Six weeks have passed since the announcement by US President Trump, during Liberation Day on April 1, of a double-digit tariff plan, which at its peak caused an 18% contraction in the S&P 500 index since the beginning of the year; now there is an increase of about 100 points.
The assessment that can be drawn from this dynamic would indicate it as a rapid and marked correction of the overbought level ensuing the election of the new President. In practice, the question of tariffs presented several times during the election campaign and no longer postponable by the United States given that in 2024 the trade deficit, net of services, had almost reached one trillion, has represented a valid excuse for investors to realize the huge gains accrued on paper. In fact, in a globalized and interconnected world an autarkic policy is not feasible, especially by the world’s leading economy; therefore, the rush to transmit the April Fools’ Day announcements only served to sensitize international counterparts on the need to correct the extent of the imbalance that has been created over time, through a tariff increase that, in the end, will settle at 10%. Clearly, simply reading the indices is reductive, in the sense that if they have practically recovered the recent losses, at the sector and individual stock level the situation is different. The sectors most closely linked to international trade, in its various denotations, cyclical sectors including the vast technological component and the financial stocks, still present depressed valuations compared to the beginning of the year, selectively offering valid accumulation opportunities. The interpretation expressed to explain the post-tariff stock market dynamics would also remain valid to hypothesize what could happen during the next stock market sessions in the aftermath of the announcement by the rating agency Moody’s that has lowered the credit rating of US public debt, taking it from the maximum of AAA to the subsequent grade of AA1.
In this regard, it is useful to note that as far back as 2011, the S&P agency had removed the triple A rating from US debt, followed in 2023 by the rating agency Fitch, while Moody’s itself had already announced last autumn the probability of the downgrade announced on Friday. The problem highlighted by the agencies’ judgment concerns both the constant increase in federal debt as a whole – consider that the US has not had a primary surplus for 20 years – but also the size, with 882 billion dollars of interest paid in 2024 compared to 435 paid 4 years earlier, a factor that allowed President Trump to blame the previous administration for this deterioration. The fact remains that the debt/GDP ratio, which stands at 98%, is expected to reach 134% in 10 years at the current rate, bringing the percentage of interest paid in relation to GDP from 2.1% to 4.1% in the next two decades. It is therefore a priority to control the yield offered by public debt, which the Administration would strategically like to keep within 4.5%; a goal that is difficult to achieve, not only because of the issue of the agencies’ ratings, but because the duration premium of consolidated issues is undervalued by about 100 basis points thanks to the massive issuance of short-term bonds carried out by the previous Secretary of the Treasury, Ms. Yellen. Therefore, Moody’s decision can only complicate the resolution of the various problems, which are also intertwined, that the Administration is facing, ranging from the weakness of the dollar, to the placement of the debt, to its cost in terms of interest, to the August debt maturity ceiling, to the Fed’s reluctance to lower the cost of money due to persistent inflation and the low level of bank reserves; all elements that contribute to investors having a valid excuse to realize the gains of the recent, unexpected, recovery in stock prices.
Nicola Bravetti Data Source: Bloomberg
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