Weekly Newsletter: April 6, 2025
While “Liberation Day” has all the hallmarks of a national holiday, it is not likely to be remembered fondly by investors. The Trump tariffs imposed were much larger and wide-ranging than anyone on Wall Street thought, and the reactions were immediate and swift, as the markets dropped roughly 10% in two days, marking the largest 2-day drop since Covid. The two days of 4.5% declines in the S&P 500 have happened rather infrequently. Outside of 1933 and 1940, the markets were higher a year later. Over the short-term, the returns were mixed but tilted toward positive. The tariff increases rival those of Smoot-Hawley, when a recession was turned into a depression. If this is indeed the beginning of a bear market, when stocks decline by 20%+ (which have already hit small and tech stocks), the duration of a typical bear is nine months and potentially another 10% down from current levels. This would be in line with the worst drawdowns from history, outlined above. It may be a bit early to toss your last nickel into the market, but a shopping list is in order. One potential benefit of the decline is that investors are beginning to look outside of technology for diversification. Lowly bonds and consumer staples among other industry groups have held up well vs. the market averages and cushioned the blow.
The employment report and Chair Powell’s comments were to be the highlight of the week, however, they barely registered with traders. The “hard” economic data remains very good, with employment gains still exceeding expectations. Bars and restaurants saw gains as well, indicating that, for now, the consumer remains buoyant. Wage growth remains above the rate of inflation, which is also good news for spending. Chair Powell is willing to wait and see how the tariff “situation” plays out before the Fed would be willing to adjust monetary policy. On the heels of the tariff announcements, the futures markets are now pricing in 3-4 rate cuts this year, up from 1-2 two weeks ago. Inflation data, due this week, is now not likely to have much of an impact on the markets as the impact from tariffs will not be a part of the numbers. Without much of a historical guide for these kinds of trade actions, it could be six months or more before we begin seeing the actions/reactions to tariffs begin to show up in various economic data reports.
Treasury bond investors were not worried last week as yields fell (and prices rose) on bonds across the yield curve. High yield spreads have widened out to levels last seen in August of last year, when the stock market fell by nearly 10% over a two-week period following weak economic data. To match the equity bottom in 2022, spreads will need to widen even further and nearly triple to match the Covid bottom. When those spreads begin to contract again, it may be a signal that the worst of the selling is about done. For now, treasuries provide excellent liquidity and safety as the stock market tries to find its footing.
April was not supposed to be coming in like a lion, alligator, or white shark. The last five weeks have seen every industry group and nearly every asset class hurt by the market decline. A few glimmers from the utilities and staples have shown good relative performance. Outside of the groups within the SP500, bonds, gold, and emerging markets have held up well over the past five weeks. There are various signs this past week that at least a short-term bottom may be close. Many of the industry groups, as well as asset classes, are not trading near historic momentum lows. This does not mean THE low is in, but that a relief rally may ensue. From there, we can look at the make-up of the rally to determine whether it is a head fake or something that may be a bit more lasting. As usual, the short-term looks bleak, but longer-term periods following the steep declines we have experienced point to better returns from here. Large market swings will continue to be the norm until the tariff rhetoric begins to calm down. The potential for a rate cut by the Fed to ameliorate the economic impact could also help stocks find a bottom. Finally, continued good economic news (modest inflation, good employment) will also help calm the frazzled nerves of this past week.
While usually very important, the inflation data is not likely to be a focus this week as tariff discussions are likely to remain front and center. There will be plenty of Fed chatter as well to add to the strange brew.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.