Tariff-ic Rally or Just a Bluff?

Markets are hitting fresh highs, but is this a true breakout or just a tariff-fueled head fake? Joining us from the floor of the CBOE Global Markets, Scott Bauer breaks down what’s driving the rally- and whether it’s built to last.

Summary – IBKR Podcasts Ep. 272

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Jeff Praissman 

I’m gonna kind of paraphrase Blazing Saddles — what in the wild world of sports is happening with the markets? We’re experiencing new highs in the S&P from its previous late February peak. What is driving this? 

Scott Bauer 

It’s actually crazy. You and I combined have probably been doing this for 60 years, and I’m not sure I’ve ever seen a comeback, a rally like what we have seen. And I think what’s happening is the tariff fears are not as bad as when the news first came out a month or two months ago. Economic fears have diminished quite a bit. You know, that milder stance on trade, if you will, compared to what the rhetoric was four weeks, six weeks ago, has really calmed the markets. And what we’re seeing is this recovery has expanded to include stocks that are across many sectors. It’s not just Mag Seven here, so it is definitely broadening out. 

Jeff Praissman 

Yeah, no, that actually leads me right into my next question. I was gonna ask you, what role have, you know, the various sectors played in this movement? Are there specific sectors — forget the Mag Seven even — but are there specific sectors that are having outsized influence, or really are just all ships rising right now? 

Scott Bauer 

It really is all ships are rising, but what is lagging are the small caps, the Russell here, with inflation risks lingering somewhat. I know people are saying that if and when the tariffs actually go into effect, that we may see some rising inflation, but economic growth forecasts are not as bad as they were. The Fed’s cautious stance has probably eased up a little bit. And what has this all led to? It’s led to this broadening, especially in defensive sectors — utilities, healthcare, consumer staples. We’re also seeing some growth sectors besides tech. You look at the financials — and the financials are just gangbusters — and that’s typically a really good barometer of the overall market, if you will. And we’ll start getting some of those big bank earnings in about a week or two. 

Jeff Praissman 

And we had ADP come out today and we have several economic indicators coming out tomorrow — like the initial jobless claims, the employment report, and the U.S. trade deficit. Do you think the market’s pricing them in appropriately, or do you think there could be some surprises? Or is it just too hard to tell until-

Scott Bauer 

It certainly seems like there’s a lot of complacency right now — that the market is pricing in probably a number on the lower end. Not necessarily as bad as the ADP number was. I think the expectation is for 120,000 new jobs. My guess is, the way the market is acting, it’s probably gonna be somewhat close — maybe a little shy of that — but it will be an important number because it’s just more fuel for the Fed to cogitate over what they’re going to do. Which, at this point, most likely is July — no hike — or excuse me, no decrease in rates. But at the September meeting, that’s over 90% probability now that we will start seeing rates going down. 

Jeff Praissman 

Got it, got it. And we’re rolling into a short week this week, with a half trading day tomorrow and the day off for the Fourth on Friday. But in the next couple weeks, are there other events occurring that the market’s starting to look at and trade around? 

Scott Bauer 

Yeah, absolutely. Next week, something that may not be on everyone’s radar yet — but next Wednesday, we have a 10-year note auction. That is going to be huge. How is that going to affect the marketplace? Are yields going back up? Is there going to be demand for the 10-years? So that’s something to really watch on Wednesday. Obviously, on July 9th — that’s the big proposed tariff day. So is that gonna be a kind of buy-the-rumor, sell-the-news event? Is it going to be extended? Which would be what my guess is — that may be pushed down the road a little bit. We get Fed minutes next week, and then also — here we are — we’re right back at earnings season again. Earnings season starts up next week, and then the following week is when the big banks — Goldman, JP, Citi — they all start reporting as well. 

Jeff Praissman 

Got it. Yeah, no, lots of good stuff on the horizon. And Scott, thank you so much for swinging by the IBKR Podcast studio via the floor of the CBOE. Always great seeing you, and until next time — enjoy the holiday. 

Scott Bauer 

You too. Thanks a lot, Jeff. 

Jeff Praissman 

Great. Thanks, Scott.