By Chris Puplava
Chief Investment Officer, Financial Sense® Wealth Management
February 28, 2025
The initial surge of optimism in the stock market following Trump’s election has faded. Business and consumer confidence, which soared due to reduced tax uncertainty and hopes for a strong economy, is now being replaced by concerns over tariffs and government job security.
Companies may cut back on capital expenditures, and cautious consumer spending could lead to stagflation—a combination of slow economic growth and high inflation. These conditions could weigh on the economy and the stock market in the coming months.
Given the current panic-driven sentiment, we believe the market is nearing a bottom. However, we plan to use any rally as an opportunity to raise cash and adopt a defensive stance. While short-term pain may be necessary for monetary policy to turn more stimulative, a stable geopolitical environment under the Trump administration will be required before a solid market recovery can begin.
The Uncertainty of Tariffs
To emphasize how tax uncertainty has been replaced by tariff uncertainty for businesses—and to demonstrate the challenges CEOs face in navigating the current political climate—I want to share remarks from the CEO of Alcoa, one of the world’s largest aluminum producers. The CEO delivered these comments earlier this week at the BMO Metals, Mining & Critical Minerals Conference:
Currently the US is short 4 million metric tons on an annual basis of aluminum. We import, the US imports that from Canada largely, which is 2.8 million metric tons of the 4 million metric tons short, and the other 1.2 million metric tons from different parts of the world.
Our view is that currently those two tariffs [25% tariff on aluminum and a separate 10% tariff on energy and critical minerals] would stack for a 35% net tariff coming from Canada. We think that's a particularly bad outcome for a number of reasons and I'll highlight some of them. But first of all, if there is a differential tariff between Canada and the rest of the world, that will incent or motivate metal to go from Canada into Europe, and potentially pull metal from the rest of the world, Middle East and India, into the US. You will literally see ships passing each other that have the exact same products coming from Europe and coming into Canada. And it really makes very little sense.
I don't have updated numbers for a 35% tariff, but we have a view that a 25% tariff will destroy about 20,000 direct US aluminum industry jobs and could result in 80,000 indirect jobs being eliminated in the US. So we view it's bad for the US.
Echoing the above, here are other comments currently being made by a number of notable CEOs and business leaders:
“A difficult time to invest.” –Citadel CEO Ken Griffin
“Everybody’s paralyzed.” –ON Semiconductor CEO Hassane El-Khoury
“I’m sorry I can’t be particularly positive.” –Franklin Templeton CEO Jenny Johnson
“The chaos that is reigning right now is causing everyone to sit on their hands.” –Nasdaq Private Market CEO Tom Callahan
Investors and businesses are particularly uneasy due to inconsistent communication from the White House. On February 26, Trump announced that tariffs on Canada and Mexico would be delayed to April 2, only for aides to later state they would begin as scheduled on March 4. Hours later, Trump declared that the European Union would face 25% tariffs in April as well.
Market Sentiment Signals Extreme Fear
This policy flip-flopping has unnerved the market, leading to a sharp decline in investor sentiment. The American Association of Individual Investors (AAII) survey shows sentiment falling to levels last seen during the 2008-2009 financial crisis and the 2022 inflation shock.
Other market measures of sentiment are also pointing to extreme fear readings such as CNN’s Fear & Greed Index (blue line below) with its current level of 18 at extreme fear and often associated with market bottoms in the S&P 500 (orange line below) as seen by the highlighted regions:
We believe given the deeply oversold condition and panic levels of sentiment that an oversold bounce is near and why we aren’t raising cash just yet. We would rather raise cash as the market rallies into strength than near a market bottom and then maintain a defensive posture once more. Here are the reasons why...
The Impact on Jobs and Economic Growth
In addition to market volatility, federal job cuts could exacerbate economic weakness:
- 300,000 federal jobs are expected to be lost due to government spending cuts.
- A Brookings Institution study suggests that for every federal employee, two contractors are affected, bringing potential total job losses to 1 million.
This comes at a time when:
- U.S. consumers—who drive two-thirds of the economy—are pulling back on spending.
- A surge in imports is widening the trade deficit, increasing the risk of economic contraction in Q1.
With these challenges, stocks and interest rates may remain under pressure, reinforcing our defensive stance.
Potential Fed Response: Rate Cuts and Debt Monetization
We expect near-term economic weakness to increase the likelihood of:
- More Federal Reserve rate cuts.
- Debt monetization—first by ending balance sheet reduction, then by purchasing U.S. debt.
Foreign demand for U.S. Treasuries (USTs) has declined, forcing primary dealers to step in as buyers of last resort. This strains banking system liquidity, similar to the 2019 “repo crisis”, which led the Fed to reverse course and expand its balance sheet.
Given these risks, we are holding precious metals and Bitcoin as hedges.
Looking Ahead: Volatility and Opportunity
Trump’s first term saw increased volatility, and his second term is likely to be even more turbulent. In times of heightened uncertainty, holding cash is essential.
To clarify our outlook:
- We do not expect a bear market or recession.
- We anticipate economic and market weakness in the short term.
- Once the Fed implements stimulative measures and tariff policies stabilize, markets are likely to recover and reach new highs later this year.
- While our conviction remains for new highs in the stock market, our visibility on the path forward has deteriorated significantly due to Trump's volatile tariff policies.
For now, we remain cautious, ready to raise cash during rallies, and prepared for potential policy-driven shifts that could impact both markets and portfolios.
To speak with any of our advisors or wealth managers, feel free to Contact Us or give us a call at (888) 486-3939.
Advisory services offered through Financial Sense® Advisors, Inc., a registered investment adviser. Securities offered through Financial Sense® Securities, Inc., Member FINRA/SIPC. DBA Financial Sense® Wealth Management.
Content is for informational purposes only and does not constitute financial, investment, legal, or other advice.
There are risks involved in investing, including the potential for loss of principal.
Forward-looking statements are based on assumptions that may not materialize and are subject to risks and uncertainties.
Any mention of specific securities or investment strategies is not an endorsement or recommendation.