Daily Stock Market Articles

3 Unusual Things About This Selloff


(Updated as of 3pm CST 4/9/2025) We had the largest tariffs in over 100 years on for about 12 hours, before President Trump paused them for 90 days for countries that did not retaliate. That’s a relief, though we could be right back here in 90 days. But hopefully this gives the White House time to negotiate with everyone and ease the temperature a bit.



Keep in mind that several additional tariffs have already been imposed, including 20% tariffs on Chinese imported goods. 25% tariffs on steel and aluminum, 25% on automobiles, 25% tariffs on non-USMCA compliant goods from Canada and Mexico (and a lot of goods are non-compliant, because costs of compliance were high), and 10% tariffs on all other imports.

These are already having an impact on importers in the US, who are the ones who have to pay the taxes (tariffs!), as opposed to the exporting firm.

Here’s a hypothetical example. A small business owner in the US ordered aluminum parts from China, worth $3,380, and they crossed the border on March 31st. The shipper, DHL, requires $2,483 for import duties (tariffs) to be paid, or they’ll send the shipment back to China. The tariffs amount to a whopping 73% of the cost of goods, and include the 25% tariffs on China from Trump’s first trade war, 25% steel/aluminum tariffs, and 20% tariffs imposed on Chinese goods in March. Needless to say, it’s not easy on a business owner when a $3,380 order comes with an extra $2,483 tax bill.

But it could be worse. Luckily for this small business owner, this shipment came before the additional 84% tariffs on China’s goods go into effect on April 9th. though that’s likely to be small solace since they likely will have to order more parts for the business to continue as before. Or maybe it won’t if they decide they cannot be profitable anymore.

As you can see, its businesses in America who pay the tariffs (not China) and they’re going to have to decide whether to eat the higher cost from their own profit margins, or to pass it on to their customers. And for some owners that will mean a decision about whether they can stay in business.

This is going to be a problem for businesses across America. But when I mentioned that we have a big problem in the title, this is not what I meant (which is not to minimize the tariff problem). There’s something hugely problematic happening in markets, and it’s not even the fact that equities have crashed over the last four days. Instead, it’s the US Treasury bond market, typically the most liquid and deepest market in the world, that is throwing a fit.

Meltdown in The Bond Market
Treasury Secretary Scott Bessent has argued that even if the tariffs create a short-term economic slowdown and volatility in the stock market (check), that wouldn’t be too concerning since only the top 50% of households by income own stocks (note that this isn’t quite true, with lower income households owning at anywhere from $2 – $3 trillion in stocks, which is not nothing). His main goal is to get long-term interest rates to fall, since that would help lower-income households who tend to have more debt service costs. (Note that an economic slowdown, or recession wouldn’t be great for this group either because that could mean they lose their jobs.)

There’s also been an argument that this whole exercise of imposing massive tariffs is to reduce interest costs for the federal government, which has to refinance $9 trillion of debt next year. In reality, the federal government always has a lot of debt to refinance because it issues a lot of short-term debt (which all of us happily purchase, including in money market accounts). However, the interest rate on that depends heavily on short-term policy rates determined by the Federal Reserve (Fed). And if you want the Fed to cut rates, policy that sends inflation the wrong way would not be the way to do it.

In any case, we may have a big problem on our hands. US Treasury interest rates are surging. The 10-year yield has surged to 4.45%, which is the highest level we’ve seen over the past month. On April 1st, the day before Liberation Day, the 10-year yield was at 4.17%. It fell as low as 3.92% as stocks plunged, before surging more than 0.5%-points over the last three days. That’s a massive move.



Is This China’s “Revenge”?
Yields rose sharply on Tuesday (April 8th) after a weak Treasury auction for $58 billion of short-term 3-year debt. There are rumors that this was China’s “revenge,” i.e. they’re selling US Treasuries in retaliation for tariffs. Let me be clear: this is just pure speculation without even a hint of evidence.

For one thing China does not own a lot of US Treasury debt anymore, just about $760 billion. If they were selling US debt, they would be selling USD and buying yuan, in which case we’d see major appreciation in the yuan. That’s not happening right now — in fact, the opposite. The PBOC (China’s central bank) set the yuan reference rate just above 7.2066, slightly weaker than the prior day’s level of 7.2038, and the fifth straight day of fixing the yuan lower. The yuan is now close to the lowest level in a decade and a half, with the PBOC carefully managing a gradual decline in their currency. Of course, this has the added effect of shielding the economy from tariffs, since it makes Chinese goods even cheaper (though they have a long way to go to overcome a 104% tariff).



A Dash for Cash
Instead, it’s likely due to portfolio managers at hedge funds liquidating positions. For one thing, cash is paying 4.3%, and so with the prospect of inflation (from tariffs), why would you want to take extra risk on long-term bonds? Inflation expectations over the next year, as measured by inflation swaps, have surged to almost 3.6%, which is the highest since mid-2022.



Several hedge fund strategies are also being unwound. There’s something called the “basis trade,” where funds use a ton of margin to take advantage of tiny difference in prices for Treasuries and associated futures. These are very small price differences and you need a huge amount of margin (about 50x) to make real money on it. Hedge funds were expecting Bessent to cut banking regulation this year, and one rule involved something called the “standard leverage ratio,” which makes it more expensive for banks to hold Treasury debt. These funds expected banks to start buying debt again and bet that Treasuries would outperform interest rate swaps (derivatives that are bets on yields). But because of tariffs, and rising inflation expectations, yields have risen, and banks are selling Treasuries instead. And so, interest rates swaps have outperformed Treasuries, forcing funds to delever (reduce margin) and unwind their positions. Oops.

The Fed’s Conundrum
A big part of what’s happening in bond land is the conundrum facing the Fed. Growth expectations are falling, best highlighted by crashing energy prices. WTI oil prices have plunged 20% over the last week to almost $56/barrel. At that price, we’re not going to get new drilling activity in the US, as oil producers need prices near $65/barrel to profitably dig new wells.



Lower growth expectations, or even a recession, should ordinarily lead one to expect the Fed to cut rates (and markets expect five cuts now in 2025). The problem is 1-year inflation expectations, as I noted above, have surged to 3.6%. That makes it very hard for the Fed to cut rates, even if inflation is “transitory.” In fact, Chicago Fed President, Austan Goolsbee, normally the most dovish member of the FOMC, just expressed concerns that inflation could be persistently high for a while — that’s not good.

The market coming to terms with the possibility that the Fed may not cut rates as much as they expect, or at all, could be the next shoe to drop. Of course, if there is a seizure in the Treasury market, like in March 2020 when Treasuries sold off rapidly as funds deleveraged, the Fed may step in to provide liquidity. But that’s different from cutting rates and supporting the economy overall with lower rates, unless their actions are taken as “forward guidance” for upcoming rate cuts. Color me skeptical on that. Now, if the unemployment surges, say to 4.6%, we could see a rate cut, but that would mean the economy is in real trouble. In any case, the Fed is not going to cut rates until they see poor data, which means they’re going to be behind the curve.

This is the problem when you have an inflation constraint — something that didn’t exist for most of the last 30 years. The big exception was in 2022, but the Fed was quite willing to throw the economy under a bus back then to get control of inflation, with Powell and co saying a recession is likely and projecting much higher unemployment rates.

A Weaker Dollar Creates Another Problem
One way to mitigate some of the inflationary impact of tariffs was a stronger dollar, as the current White House Chair of the Council of Economic Advisors, Stephen Miran, has suggested. However, given the magnitude of the tariffs, this was always going to have a minimal effect.

The problem is that the dollar has been going in the opposite direction. It’s been easing this year, with the dollar index down 5.5% year to date. It’s also pulled back almost 2% since April 1, the day prior to Liberation Day. That’s not good, as it makes imports even more expensive.



When people ask me what’s the difference between an emerging market (EM) and developed market, I tell them that my market-oriented perspective is that a country is an EM if the following happens during a crisis:

• Stocks fall
• Sovereign government bond yields rise
• Currency falls

We now have this exact environment in the US. Even in March 2020, as equities crashed, and Treasury yields rose briefly (before the Fed stepped in), the dollar was appreciating. That’s not the case now.

The only way to explain these moves is that investors, and the rest of the world, has lost confidence in America and is no longer flocking to the traditionally perceived safety of the US dollar and Treasuries. These now have a significantly higher risk premium and may no longer be “exceptional.” This is not to say markets won’t recover — they could (but we’re going to need to see a reversal from the White House for that). But going forward the usual expected correlations between different parts of an investment portfolio — US stocks, international stocks, bonds, cash, and even commodities — may need to be adjusted quite significantly.

 

Sentiment Stays Bearish
Thu, Apr 10, 2025

Even before the extreme volatility of the past week, the technical correction in stock prices had meant that investor sentiment tanked. Granted, even when the S&P 500 was last at an all-time high in mid-February sentiment leaned bearish with the percentage of respondents to the weekly AAII survey reporting as bulls only sitting at 29.2% as of February 20. Over the next three weeks, it dropped to local lows in the 19% range and as of today's release, it was back up to 28.5%. In other words, even through all the crazy moves in the market, investors amazingly appear to be only slightly less bullish than they were at the time of the February 19 high.



Of course, that is still a muted level of bullish sentiment. Meanwhile, the percentage of respondents reporting as bears is much more elevated than it was two months ago. Whereas the February 20 reading in bears was only 40.5%, today it is at 58.9% which was down versus 61.9% last week.



That means that investors continue to overwhelmingly report bearish sentiment with increased polarization to boot. The share of respondents reporting neutral sentiment reaffirms this. That share dropped to a meager 12.5% in the latest week's data. That ranks in the first percentile of readings in the full history of the data dating back to 1987 and is the lowest reading since it came in at 11% on May 28, 2009.



Of course, other sentiment surveys offer additional looks at investor sentiment. One such report is the Investors Intelligence survey which has a survey base of newsletter writers. One perk of this survey is a much longer history beginning back in 1963. This week's release indicated the lowest level of bullish sentiment, 23.6%, since December 2008. Before that, the last time sentiment was this weak was in July 1994. So it's been rare for investors to be this outright negative of equities.

We would also note that this survey collects data through Tuesday afternoons with a release early Wednesday mornings. That means this latest data would not have reflected any reaction to yesterday's update on tariffs nor the massive surge in stock prices in response.



That weak sentiment is unsurprising given the trade war's implications for the global economy and the collapse and general volatility in stock prices we have seen in the past week. To help further quantify this, in the chart below we show the percentage spread between the S&P 500's closing highs and lows for all one-week periods ending Tuesday, which coincides with the Investors Intelligence survey's collection period, going back to the start of the survey data in 1963. In the latest week, we saw a 12% range between the S&P 500's high and low on a closing basis, one of the more volatile weeks of this period.



In the chart below, we show those weeks when the S&P 500 had a 10%+ range between high and low closing prices during the Investors Intelligence survey collection period while also trading lower during the span. As shown, the past week was the 18th example. For starters, the S&P 500's range this go around was middling (47th percentile) for these occurrences although the decline was one of the larger ones, slightly outpacing the median decline of 9.5%.

As for the changes in sentiment, bullish sentiment according to the Investors Intelligence survey is the second lowest of these instances behind late October 2008. The week-over-week decline was also larger than normal, nearly doubling the average move. While that survey's bearish sentiment reading wasn't even in line with the average, the week-over-week uptick was again more than double what has historically been the norm during weeks with this much volatility. In other words, currently, we are seeing extreme volatility and extremely bearish investor sentiment, especially among investment professionals (i.e. newsletter writers).

 

Country ETFs Since Liberation Day and Pause Day
Fri, Apr 11, 2025

The S&P 500 (SPY) rallied 5.7% this week but remains down 5.4% since the close on "Liberation Day" on 4/2. Below is a look at the performance of 45 country ETFs traded on US exchanges since 4/2 and since the close on 4/8 before President Trump announced the 90-day pause on reciprocal tariffs for all countries except China.



The average country ETF is down 4% since 4/2, so SPY has underperformed that since Trump's Rose Garden announcement. Since the close on 4/8 before the pause, the average country ETF has bounced back 7.9%, so SPY has underperformed slightly on the bounce-back as well.

The country ETFs that have bounced the most since the pause are ones you might expect. Asian countries like Vietnam (VNAM) and Thailand (THD) had some of the harshest reciprocal tariffs announced on Liberation Day, and since the pause, these two have bounced back 16.7% and 14.1%, respectively. Thailand (THD) is now down just 1.2% since Liberation Day.

The third best country ETF since 4/8 has been Argentina (ARGT) with a gain of 12.8%. ARGT gained 6.5% on Friday to end this week.

China -- the country most punished by Trump's tariffs -- has bounced back for US investors that own the MSCI China ETF (MCHI) since the pause even though Trump hiked China's tariff rate to 125% on Wednesday. MCHI is up 9.9% since the close on 4/8 versus SPY's gain of 7.5%. Since Liberation Day on 4/2, MCHI is down 8.3%, though, compared to SPY's decline of 5.4%.

There are four country ETFs down less than 1% since Liberation Day: South Korea (EWY), Switzerland (EWL), New Zealand (ENZL), and Belgium (EWK). Colombia (GXG) and Hong Kong (EWH) head into the weekend as the only country ETFs still down 10%+ since 4/2.

 

Tariff Pause Rebound Could Persist During Historically Bullish Good Friday Week

Good Friday is the one NYSE holiday with a clear positive bias before and negativity the day after (Stock Trader’s Almanac 2025, page 102). DJIA, S&P 500, NASDAQ, and Russell 2000 all have solid average gains on the three days and full week (shortened) before Good Friday. NASDAQ has been notably strong, up 21 of the last 24 days before Good Friday with an average gain of 0.75%. NASDAQ declines occurred in 2017 (–0.53%), 2022 (–2.14%), and 2024 (–.12%).

However, the day after Easter has a weak longer-term post-holiday record. The S&P 500 was down 16 of 20 years from 1984-2003 on the day after Easter while it has modestly improved recently, up 13 of the last 21 years. Post-Easter weakness has been generally short-lived with average gains 2- and 3-days after.

 

Easter Seasonality
Mon, Apr 14, 2025

With all the craziness of the past few weeks, many investors could use a day off to catch their breath, and that's what we'll get later this week. Equity markets will be closed on Friday in observance of Good Friday. So far during the season of Lent—the more than 40-day period between Ash Wednesday and Easter—markets have appeared to have given up buying. Historically, the bulk of this period (the last close before Ash Wednesday through the last close before Good Friday) has had a positive seasonal bias with an average gain of 1.83% and positive performance 67% of the time. While there are still a few days left, the 5.68% decline this year puts the S&P on pace for the fourth worst performance during Lent of all years since the start of the five-day trading week in 1953. The only years with larger declines were a 10.86% drop in 1980, a 10.82% decline in 2020, and a 5.92% decline in 2001. Again, there are still a few days left, and the elevated volatility recently could change that ranking, but we'd also note in 1994 there was a similar-sized drop to now at 5.66%.



In the chart below, we show the average daily change in the S&P 500 for each day during the holiday-shortened week in addition to Easter Monday. We also include a look at full-week performance for the week and the following week. As shown, the week of Easter has typically held a positive tone with the largest and most consistent gains coming right before the long weekend on Thursday. Monday and Tuesday, on the other hand, have seen the S&P 500 fall more often than not. Regardless, for the full span of "Holy Week", the S&P 500 has averaged a 0.66% gain with positive returns just under two-thirds of the time. After coming back from the holiday, stocks haven't tended to continue rallying. Easter Monday has averaged a decline of 16 bps with positive performance less than half of the time. Once again though, the full week after Easter has seen the S&P 500 generally trade higher.

 

NY Fed Shows Weak Demand and Flying Prices
Tue, Apr 15, 2025

On Tuesday morning, we got the first update on regional manufacturing activity for April with the release of the New York Fed's Empire State Manufacturing Survey. The headline reading came in better than expected, rising from a 15-month low of -20 last month to -8.1 in April. While that marks a second straight month of observed contractionary activity, expectations appear even worse. That index fell an enormous 20.1 points month over month for the second-lowest reading in the survey's history. That month that was worse: September 2001. Regarding the month-over-month move, September 2001 and March 2020 are the only other months with bigger drops.



In the table below, we include a look at the April and March readings across all categories of the report. We include the sequential change and how those all rank in percentiles. As shown, breadth and levels were not too bad for current conditions whereas six-month expectations look disastrous including a handful of record lows and bottom quintile monthly declines.



To quantify the drops across those expectation categories, below we have taken a standard deviation for each category and then averaged across them. As shown, that reading dropped into negative territory this month. In the post-pandemic period, there have been a couple of other months to also see negative readings (in July and November 2022), although this current reading is considerably lower. As such, April's reading of -0.12 is the worst since April 2020, and before that, only the Great Recession and 2001 saw weaker expectations. Likewise, the more than one standard deviation drop over the past three months marks one of the most rapid declines in expectations on record.



As noted earlier, the drop in expectations indices has led to record lows in some. That applies to new orders and shipment expectations with current condition indices for both categories also remaining in contraction. That would indicate the region's firms have been observing softening demand, and things are only expected to get worse.



It's not exactly a silver lining, but not every category has fallen sharply. Two categories in the upper quintile of readings with sharp moves higher in the past month were inflation-related. Prices paid and prices received are both rocketing higher in terms of current conditions and expectations. For current conditions of both categories, this was the most elevated level since August 2022. As for expectations, it was the highest level for prices paid since June 2022, and April 2022 for prices received.

 

DJIA Up 34 of Last 43 April Monthly Expiration Weeks

April’s monthly option expiration is generally bullish across the board with respectable gains on the last day of the week, the entire week, and the week after. Since 1982, DJIA has advanced 28 times in 43 years on monthly expiration day with an average gain of 0.23%. S&P 500 has a similar record with 27 advances and an average advance of 0.15% on monthly expiration day. Monthly expiration day was trending solidly bullish after four or five declines from 2014 to 2018 but took a hit in 2022’s bear market and again in 2024.

Monthly expiration week also has a bullish track record over the past 43 years. Average weekly gains are +1.08% for DJIA, +0.83% for S&P 500, and +0.84% from NASDAQ. The bullish bias of April monthly expiration also persists during the week after although average gains have not been as strong with selling pressure rising recently (since 2018).

 

Here’s How the US Tax Code Results in a Larger Trade Deficit


Happy Tax Day! Or not. Though if you’re a large multinational, tax day in the US doesn’t really matter. In fact, to “celebrate” Tax Day, I’m going to discuss how the US tax code impacts the trade deficit. This is very relevant now because of everything going on around tariffs, with one of the stated goals being to reduce the trade deficit. In fact, the Liberation Day “reciprocal tariffs” had nothing to do with tariffs imposed by other countries on American goods and everything to do with the US trade deficit in goods with each country (I wrote about this at the time).

Take Ireland for example. In 2024, Ireland exported $103 billion of goods to the US and imported just $16 billion of goods from the US. That resulted in an $87 billion trade deficit for the US with Ireland. That’s about 7% of the US trade deficit in goods with the entire world (total $1.2 trillion in 2024) and a whopping 37% of its trade deficit with the European Union ($236 billion in 2024).

Keep in mind that Ireland is a tiny country whose GDP is under $600 billion, which is just about 0.5% of total world GDP. The population is about 7 million. I’m sure the Irish have a darn good work ethic and are extremely productive relative to the rest of the world, but their US exports clocking in at 17% of GDP should immediately make you suspicious. Turns out there is more than meets the eye.

Ireland: A Pharma Haven Created in DC
Most of America’s trade deficit with Ireland is actually just pharmaceuticals, and overall, pharmaceuticals accounts for about half of America’s trade deficit with the EU. As Brad Setser, a trade expert at the Council on Foreign Relations, points out, Ireland’s success is a direct result of incentives in the 2017 Tax Cut and Jobs Act (TCJA). It was signed into law by President Trump in his first term and ironically, the goal was to reshore US production, and profits. That didn’t turn out to be the case. Instead, it accelerated pharma imports into the US and widened the trade deficit in pharmaceuticals significantly. Some numbers:

• In 2017, the US imported $110 billion of pharmaceuticals from the rest of the world. That’s risen by 153% to $278 billion over the 12 months through February 2025.
• In 2017, the US exported $51 billion of pharmaceuticals to everyone else. That’s risen 112% to $108 billion as of February 2025. Not bad, but not as much as imports have surged.
• As result, the pharmaceutical trade deficit has surged from $59 billion in 2017 (7% of the overall goods trade deficit) to $160 billion in February 2025 (12% of the overall goods trade deficit).

The chart below starkly illustrates what’s happened since 2018 (post-TCJA). Pharmaceuticals are now the second largest manufactured import into the US (after automobiles) and a key driver of the trade deficit. And this one is actually made in DC. If I were to place odds on the likelihood of new tariffs bringing manufacturing back to the US, the unintended consequences of the TCJA would certainly incline me to lower them some.



Ireland has been a well-known tax haven for over a decade now, with US tech companies, cola firms, and pharma companies rerouting profits through the country to avoid US taxation, so much so that Ireland’s GDP is completely skewed by multinationals shifting profits and intangible assets (intellectual property, including cola formulas) to Ireland. It’s even skewing EU GDP growth, but it has nothing to do with domestic demand in Ireland. For example, in 2023, Irish GDP fell by 5.5%, but that’s because multinational activity contracted by 16.2%. Their statistics office releases another measure called “modified domestic demand,” and that grew 2.6%.

But since 2018, we’ve seen a shift with pharmaceutical imports surging. Here’s a brief look at what happened, courtesy of Brad Setser at the Council of Foreign Relations. TCJA made big changes to the corporate tax code, lowering the corporate tax rate from 35% to 21%. But it really created 3 tax rates:

• A new 21% corporate tax rate
• A reduced 13.125% rate on the export of intangibles – as a result of which tech companies like Google and NVIDIA on-shored their intellectual property
• A 10.5% global minimum on intangible income (“GILTI”)

The last one is important for pharma companies as their profits are mostly driven by intangibles like patents and marketing. The cost to produce isn’t that high. Since 10.5% is lower than the new corporate tax rate of 21%, pharma companies shifted production outside the US, making significant investments in tax havens like Ireland, and even places like Singapore. Thanks to a combination of offshore production, offshore taxation (often negligible), and the 10.5% GILTI rate, Large US pharma companies pay a lot less in taxes — with big US pharmaceuticals not paying any tax in the US at all.



What’s remarkable is that the big US pharma companies reported losses on US operations, with the entirety of their profits generated abroad. Ironic, because drug pricing is pretty steep in the US and so you’d think the US would be a profit center. But TCJA incentivized moving production offshore.



To summarize, here’s where we ended up post-TCJA

• Lower tax revenue
• A shift of production (and jobs) offshore
• A higher trade deficit

No wonder Brad Setser called TCJA the Pharma Tax Cuts and Irish Jobs Act.

But this may be ending and not in a great way. Ideally, the US would be fixing the TCJA, and there’s a good opportunity to do it because Congress is in the middle of figuring out a new tax bill. Instead, the “fix” is coming via tariffs, which is basically compounding the bureaucracy now. The Trump administration is looking to use national security grounds to investigate imports of pharmaceuticals (and semiconductors), in a bid to impose 20-25% tariffs — these goods are currently exempt from the 10% baseline tariffs that the US started collecting on April 5th (rates over this were suspended for 90 days for most countries).

All this is also why negotiations are going to be extremely difficult. As part of the “reciprocal” tariffs, the US imposed 20% tariffs on EU goods. Ireland kind of got away with one here because if they were not part of the EU, their reciprocal tariff rate would have been about 40% using the calculation the administration used for everyone else. Still, if the administration’s goal to reduce America’s trade deficit with the EU, they’re going to have to discuss how the US tax code is a big part of the problem here. The Trump administration will argue that “non-tariff barriers” have to go away, but in Ireland’s case, their non-tariff barrier is that their corporate tax rate is really low. It’s highly unlikely they increase taxes in Ireland as part of any deal. You can see how all this gets complicated very fast.

At the end of the day, the bottom line is if the goal is to reduce the trade deficit, you’re going to have to tackle the pharma trade deficit. Either you put heavy tariffs on pharmaceuticals and/or get countries like Ireland to increase their tax rates. That’s how you disincentivize offshoring of production and try to get it back to the US. However, you can see how this means one or both of two things:

• Prices will go up (including for generics, which are mostly coming from India and China)
• Reduced profit margins for pharmaceutical companies (they do have high margins)

It gets to the point that a trade war doesn’t simply involve realigning trade flows across the world, and in and out of the US. It’s also going to change how companies make profits around the world, and this is important because 40% of S&P 500 company revenues come from outside the US. If you break how the global trading system works right now, you’re going to break how capital (and profits) flows around the world as well. Over the last 20 years, US multinationals (and thereby the US stock market) have been big beneficiaries of the existing trade regime. That may be ending. This is not to say they’ll stop making profits (even if it means higher prices for consumers), just that there’re likely to be a transition and right now there’s a lot of uncertainty as to how exactly the transition is going to happen, and how painful it may or may not be.

 

Bull Market? Bear Market? Or Something in the Middle?


“The wise make great use of adversity, the foolish whine about it.” Dee Hock, Founder of Visa

The wild market action continues, but at least stocks have bounced and in some big ways the past week or so. Back on Monday, April 7, the S&P 500 opened up down more than 2%, yet stocks finished the week up more than 5% for the best week since November 2023. Did you know the last time we saw a week start off that poorly, yet finish up more than 5% was May 1970, which kicked off a 56% rally? Yes, sample size of one, but I like to share potentially good news and that is good news if you ask me. Here are some other bits of good news I’ve seen lately.

Bounce
Stocks were flirting with a bear market until President Trump put a pause on all reciprocal tariffs (excluding China) for 90 days on Wednesday, April 9. The S&P 500 responded by gaining 9.5% in one day, the third best single day since World War II. Like a beach ball under the water, once it gets some momentum, it can really start moving. In fact, we found 23 other times (since 1950) the S&P 500 gained more than 5% in one day and the future returns were quite impressive longer term, with stocks up a year later more than 91% of the time and up nearly 27% on average.



Just How Rare Was Wednesday?
It wasn’t just that last Wednesday saw huge gains. Nearly all the volume on the NYSE was for stocks moving higher as well (something we call a buying thrust). In fact, advancing volume was 98.6% of the total volume, the most in history (using reliable data back to 1980). We found six other times that had extreme levels and the S&P 500 was higher 3-, 6-, and 12-months later every single time. Check out some of those dates. August 1982 and March 2009 really stand out as some historic buying opportunities. This could be another clue that the sellers scared by currently known risks have exhausted themselves and higher prices over the intermediate term could be possible.



Another Near Bear Market
If you watched TV at all early last week, you likely heard how stocks were very close to a new bear market, meaning more than 20% off the February 19 peak. Intraday it did hit down 20%, but on a closing basis it only got to 18.9%, close but not quite there. Yet, for many investors heavy in technology, it sure likely felt like a bear market, with many of those names down much more than 20%. Here’s the thing — we’ve seen many near bear markets lately from a big picture perspective, including 1990, 1998, 2011, and 2018. All of those years had scary headlines and worries, yet managed to barely miss officially going into a bear market. We don’t know if this time will be added to this list, or if more trouble is around the corner and we are delaying the inevitable, but with the big rally on Wednesday and some historic levels of extreme sentiment, it is possible.



Bad Things Have Happened Before
If you’ve invested in equities the past seven weeks it hasn’t been very fun; we can likely agree there. At the same time, after more than a 70% rally from the October 2022 lows and not even a 10% correction last year, we were on record that a 10-15% correction was likely this year. No, we didn’t expect a near bear market with historic volatility, but we also (like many) didn’t expect tariffs to be as high and wide ranging as they have been either.

Here’s the thing, and it is important to remember. Bad times have happened before and they’ll happen again. The other thing to remember is stocks have eventually gotten past the bad news and weak market returns every time in the past and we don’t think this time will be any different.



This hasn’t been fun for investors, but volatility is the toll we pay to invest.

 

Gold: The Shiny Rock is Shining


Most risky assets have had a volatile stretch since the Silicon Valley Bank crisis began. The S&P 500 Index has recovered but is still down about 0.5% between March 8th (the day prior to the crisis unfolding) and March 28th. In a welcome change from last year, bonds have zigged while stocks zagged, with the Bloomberg Aggregate Bond index rising about 1.4%.

But one asset has outperformed during this period: Gold, which rose 8.1% over the same period.

Gold as a crisis hedge
The last 20 days were a period when fears of an economic crisis rose. Economic growth expectations fell, and as we wrote last week, even the Federal Reserve (Fed) acknowledged that they may not have to do as much as they originally expected to slow inflation. Instead, a potential credit crunch is expected to substitute for rate hikes.

As a result, interest rates fell (which is why bond prices rose), and importantly for gold, “real” interest rates fell.

Real interest rates = Nominal interest rates – Expected Inflation
Typically, real interest rates fall when economic growth falters, and investors expect the Fed to cut rates. And over the past 20 days, the 10-year real interest rate, i.e., the yield from 10-year treasury-inflation-protected securities, fell from 1.66% to 1.24%.

That is a significant drop, and historically such declines in real interest rates have been accompanied by rising gold prices.

Conversely, gold prices have historically fallen when real interest rates rose. Which usually occurs when economic growth picks up and/or the Fed raises rates in a bid to prevent overheating and higher inflation.

The idea is that if real interest rates are high, there is an opportunity cost to holding (and storing) gold. Whereas if real rates are low or negative, the opportunity cost for holding gold falls.



Last year was a strange year for Gold
Gold is typically thought of as an inflation hedge. So, on the face of it, you would think gold would shine during a year that saw a 40-year high in inflation, with headline CPI hitting 8.9%. Yet gold prices were flat across the year.

In fact, between March 8th and September 30th, 2022, gold prices fell a whopping 18%, even as inflation surged. The problem was that the Fed got really aggressive with rate hikes after March 2022 as they looked to tame inflation. As a result, the 10-year real interest rate rose by 2.72%-points during this same period, from a low of -1.04% to +1.68%.

Talk about a brutal and abrupt end to the negative interest rate regime that we had experienced for several years.

Interestingly, real yields stabilized from October onwards, thanks to inflation data pulling back and investors expecting the Fed to ease up on the pace of rate hikes. Consequently, gold rallied, rising 15% between October and January.

Prices fell again as real interest rates resumed their uptrend – which followed a series of hot economic data releases in February that sent Fed rate hike expectations higher. This lasted until the SVB crisis hit on March 9th.



Where could Gold go next?
A lot of this obviously depends on what happens with real interest rates. Real rates are certainly lower than they were before the SVB crisis. However, with the Fed backing off the aggressive rate hike path they expected a few weeks ago, we believe real rates may not go much higher than they are now.

This means gold’s downside is potentially limited. Plus, as we saw, gold works quite well in the event of an economic downturn (in which case real yields are likely to fall), which makes the shiny rock attractive as a portfolio hedge at this time.

My colleague, Ryan Detrick, pulled the lens further back with a long-term chart of gold. You can see that gold prices were more or less flat over the last decade after stellar returns in the preceding 12 years.

Gold prices surged 508% between 2001 and 2012. Whereas it rose just 9% between 2013 and 2022.



So, gold could be on the verge of a multi-year breakout here, especially if real interest rates don’t rise much further.

 

Records in Richmond
Tue, Apr 22, 2025

US economic data was again light this morning with the only releases of note being regional Fed activity indices: a services index out of the Philly Fed and the manufacturing and services indices out of Richmond. As we noted through our Five Fed Composite last week, regional Fed releases have shown a significant deceleration in activity, and today's release out of Richmond reaffirmed that. For the headline manufacturing number, there was a decline from -4 in March down to -13 this month. That indicates moderate contraction in activity, albeit similar and lower readings were observed from July to November last year.



Although the composite has seen lower readings relatively recently, April's reading is still a bottom decile print for the history of the data going back to the 1990s. Breadth this month was also horrible with only six categories rising (not all of which are positives like inventories and prices) versus 10 categories falling month over month. In addition to weakness in current condition categories, expectation indices were especially weak. Across expectation indices, there were multiple record lows or near record lows. Those same sorts of records could also be observed for month over month changes. For example, expectations for number of employees had never fallen by more in a single month.



Perhaps one of the more concerning readings is in regards to demand adjacent categories. New Orders fell 11 points month over month down to -15 (an 11th percentile reading) while shipments also fell double digits to a 5th percentile reading. The expectations counterparts of those categories were even worse as both registered record lows. In other words, at no point of COVID, the Financial Crisis, or the 2001 recession were the region's firms this pessimistic regarding future demand.



Paired with the weakness in demand expectations was a concerning pickup in inflation which has also been seen across a range of other indicators. Current conditions of prices paid have already picked up materially, rising to a 5.37% annualized rate. While that series did see readings that were roughly three times higher at the post-pandemic peaks in inflation a few years ago, expectations at 8.38% are sitting at a new record. Prices received have also been on the rise but are currently much lower. Current conditions are only at a 2.65% rate whereas expectations are surging to 5.6%, the most elevated reading since March and April 2022.



In addition to the record lows in demand expectations, expenditures have also taken a big hit. The Richmond report includes expenditure readings for three separate categories: Equipment & software, capex, and business services. Each of those three have been in decline since interest rates began ticking higher in early 2022, and since tariff news came to the forefront this year, they have taken a sharp leg lower (reversing post-election gains) and now have only been lower during the depths of COVID.

 

Bear Market Rally? Near-Term Bounce?

Uncertainty still hangs over the market, economy & global trade. But based upon the retreat in CBOE Volatility index (VIX) from around 60 back down to around 30, our waterfall decline research, and the Republican post-election year seasonal trend, the bottom could be in, at least in the short term.

S&P 500 Post-Election Year Seasonal patterns all show some degree and duration of strength from around now through sometime between early June to early August, before the next bout of seasonal weakness could arrive at the same time the 90-day tariff pause ends.

The market may be giving the Trump administration the benefit of the doubt on tariffs for now, but time is running out for them to start showing progress and announce new meaningful trade deals.