Will April Showers Bring May Flowers?

Answer: Discussion of the Trump administration’s tariffs set markets into a tizzy during April, primarily due to uncertainty. Until we have more details, volatility will likely remain. The topic is beyond fluid, yet at the time this is being written, one specific is a 10% levy on many imports with significantly higher reciprocal tariffs expected on Chinese imports. Two reasons cited for these tariffs are trade deficits and national security concerns. China has recently stated that “the door is open” for negotiations.

April saw a 41.3% surge in imports based on businesses rushing to buy goods and services before tariffs went into effect. This could contribute to a self-fulfilling prophecy about inventory and prices to some degree. Meanwhile, the Federal Reserve decided to hold rates steady based on solid economic activity and a stable unemployment rate. The Fed’s “wait and see” approach suggests that Fed Chairman Powell will focus on inflation, employment, and economic data before taking action.

There are eleven specific sectors, or categories that stocks fall into, as defined by the Global Industry Classification Standard (GICS).

1. Communication Services (telecom, media, entertainment, and internet services).
2. Consumer Discretionary (retail, automobiles, media, and luxury goods).
3. Consumer Staples (food, beverages, household goods, and other essentials).
4. Energy (oil, gas, coal, and related services).
5. Financials (banks, insurance, investment firms, and real estate).
6. Healthcare (pharmaceuticals, biotech, hospitals, and medical equipment).
7. Industrials (manufacturing, construction, aerospace, defense, and transportation).
8. Information Technology (software, hardware, semiconductors, and information technology services).
9. Materials (chemicals, metals, mining, and forestry).
10. Real Estate (property development, management, and REITs, which stands for real estate investment trusts).
11. Utilities (electric, gas, water, and renewable energy providers).

During April, five of these eleven sectors were positive. Performance was led by technology, followed by consumer staples, and communication services, with energy declining 13.6%. Manufacturing and industrials reacted to tariff pressure and anticipated supply chain disruption, although companies are stockpiling and diversifying their supply chains in response.

Companies reliant on imports such as automotive, technology, clothing, shoes, some agriculture, and pharmaceuticals will likely face greater disruption. The financial services area may respond to anticipated economic slowdowns while trade negotiations are underway. In healthcare, U.S. based companies may actually profit from less overseas competition.

Oil prices and energy stocks have declined, with crude oil at the lowest level since 2012. Lower prices at the pumps are good for consumers. Current gas prices in the Naples area are between $2.93-$3.15 per gallon according to Gasbuddy.com. This could help consumers by placing more dollars in their pockets to help offset higher prices elsewhere.

Companies operating within a specific industry or sector often face intense competition, and their products or services may be subject to rapid obsolescence. There are additional risks associated with investing in an individual sector, including limited diversification.

Intangible vs. Tangible

Intellectual property found in the technology world is intangible, making it difficult to value using traditional measures such as price/earnings ratios. Cloud computing, software, artificial intelligence, and pharmaceutical pipelines are examples of these intangible concepts.

Intangibles now make up 90% of the market. In contrast, according to ResearchGate, back in 1975, tangible assets represented 83% while intangibles were only 17%. Intangible valuation consists of the worth of patents, a particular brand, or goodwill of a company; items that can’t necessarily be assessed the same way as “stuff” or hard assets. This adds to the challenge of valuing company’s growth trajectories.

The General Agreement on Tariffs and Trade (GATT) does consider the worth of intangible assets when valuing exports and imports. This is just another reason the impact of tariffs is particularly difficult to calculate and forecast.

One reason this is so important and essentially a national security issue is that in 2015, the United Nations Industrial Development Organization reported that China took over as the world’s largest manufacturer, making the U.S. increasingly dependent on them for more imported goods, as experienced during Covid. This is one of the stronger reasons for the focus on tariffs at the moment. Negotiations continue, and only time will tell what the end results will be.

Volatility and caution may remain, with a keen eye on greater corporate investment in the United States and more homegrown jobs. It may take more than one month to see if April showers bring May flowers. Stay focused and plan accordingly.

*Data Source: Bureau of Economic Analysis (bea.gov).