What Investors Should Be Thankful For

As Americans recover from their extended Thanksgiving feasts, they were faced with the news of skidding consumer confidence. The Conference Board’s Consumer Confidence Index weakened to levels just above the lows seen during the post-COVID expansion.
 

 

The University of Michigan’s Index of Consumer Confidence, which was released in early November, was even worse.

 

Before turning too bearish, investors should be thinking about the silver linings in this dark macroeconomic cloud of weak consumer confidence. The S&P 500 is near record highs this Thanksgiving and there are several things that equity investors should be thankful for.
 

 

Manageable Trade War Effects

First, investors should be grateful that the effects of the trade war are “less bad” than expected. Our trade war factor, which measures the relative performance of stocks exposed to domestic revenue, has surged to heights that are well beyond the levels reached during the “Liberation Day” panic. In response, stock prices didn’t crater. Instead, the S&P 500 has been steadily climbing since the April lows and the 10-year Treasury yield recently fell below 4%.
 

 

I interpret this to mean that the market believes the dire effects of the trade war are “less bad” than expected and tariff effects are manageable.

A Bloomberg podcast with Brad Setser, the former Deputy Assistant Secretary for International Economics under President Obama, and Anna Wong, Bloomberg U.S. Chief Economist, summarizes the effects from Trump’s trade war. Contrary to Trump’s rhetoric, analysis by different researchers found that foreigners absorbed a miniscule amount, or about 5%, of the new tariffs imposed by the U.S. government. Consumers paid about one-third, and U.S. importers and other intermediaries in the U.S. supply chain absorbed the rest. To be sure, regional Fed Presidents have reported that companies are waiting for signs of regulatory stability in the tariff regime before raising prices. The Supreme Court’s ruling on the legality of the IEEPA tariffs, and the Trump Administration’s reaction, will be a key factor in the reaction from the corporate sector.

From the perspective of the U.S. economy, companies have learned to manage through the effects of the trade war because of the following reasons:

• Most trade partners have not retaliated. Economists modeling the effects of a trade war modeled countervailing tariff retaliation. With the exception of China, American trading partners have not significantly raised duties on American goods.
• The effective tariff rate is lower than expected. Anna Wong said on the Bloomberg podcast that the effective rate is roughly 14%, once the effects of the recently announced exemptions on food imports are factored in, which is manageable.
• Global trade hasn’t collapsed. In particular, the tariff rates for Asian countries are all about 19% or 20%. This hasn’t incentivized manufacturers to significantly migrate manufacturing activity out of China. I pointed out in July that the U.S. failed to isolate China with its trade war, failed in its reshoring strategy and, in fact, Chinese manufacturing exports have soared (see The Trade War Is Dead, Long Live the Trade War!).

 

Putting it all together, an analysis of earnings calls reveals that corporate concerns about tariff risk is fading.
 

 

From an investor’s perspective, Q3 earnings season results were very strong, and aggregate EPS estimates have been rising. Setser explained that the really profitable companies, namely the technology and pharmaceutical sectors, are immune to tariffs.
 

 

Indeed, median EPS growth of Russell 3000 members, which is not just the Magnificent Seven, has surged to levels not seen since 2021.
 

 

 

Rate Cuts Ahead

The relatively tame effects of tariffs are opening the door to rate cuts by the Fed. Anna Wong observed in the Bloomberg podcast that the estimated effect of the tariffs is a relatively modest 0.3% increase to PCE inflation. Ernie Tedeschi pointed out that the Fed would have a clear path to cutting rates a few times were it not for tariff-induced goods inflation.
 

 

As well, a San Francisco Fed study found that tariff-induced inflation tends to be transitory. Inflation initially rises, but plateaus in the second year after tariffs are introduced, and slowly falls in the third year. That said, the decline in inflation is mainly attributable to a rise in the unemployment rate, though the latest data shows that the economy remains in a “slow to hire, slow to fire” environment.
 

 

As a consequence, market expectations of a quarter-point rate cut at the December meeting have risen to 87%.
 

 

 

A Lower Volatility Regime

Finally, investors may be in an era of “Peak Trump”, or a period when President Trump’s political influence starts to wane as he takes on lame duck status. That’s the hypothesis advanced by John Bolton, his former national security advisor and leading neocon hawk of the Bush-Cheney era, in an interview with the Economist.

Bolton pointed to the anxiety felt by Republican lawmakers in the wake of dramatic losses during the 2025 off-year elections. He also highlighted several cases demonstrating the limits of Trump’s political influence, namely the failure of the Republican Senate leadership to eliminate the filibuster in accordance with Trump’s wishes, the pushback from Republican dominated states to redistrict electoral maps, which is another Trump initiative, and the political fallout from the Epstein affair.

A WSJ editorial also outlined the growing split within the Republican Party in the wake of the Marjorie Taylor Greene resignation, the MAGA isolationist wing of the party and the traditional pro-business wing. That’s before the uproar caused by the Russo-Ukraine peace initiative from Republicans in Congress.

Here is why Peak Trump matters for investors. Trump has always been unpredictable and his impulsive nature has an outsized effect on the markets when he is in the White House. While he will continue to be unpredictable, his influence on market volatility will wane has he fades into lame duck status. The lower panel of the accompanying chart shows the VIX and MOVE indices as indicators of equity and bond volatility. Elevated volatility tends to rattle markets, which sparks a TACO (Trump Always Chickens Out) response, while tame volatility encourages Trump assertiveness. But stock prices are near all-time highs and the 10-year Treasury yield is below 4%, despite slightly elevated levels of volatility.

 

As equity prices tend to be inversely correlated to volatility, a lower volatility regime translates into higher potential stock returns. Lower bond market volatility has the additional benefit of boosting the collateral value of Treasury securities, which facilitates higher-margin lending value and adds liquidity to the financial system.

In conclusion, investors should be looking on the bright side this U.S. Thanksgiving. The trade war has stabilized, and its effects are manageable and “less bad” than expected. Weakening growth will open the door to more rate cuts by the Fed, and a scenario of a lame duck Trump is likely to reduce market volatility in the months ahead.

For the final word, I began this publication by highlighting the latest weakness in consumer confidence as a possible ominous sign for the economy. If history is any guide, weak consumer confidence has shown itself to be a contrarian buy signal for the stock market.