You like roller coasters?

I traveled to Phoenix this week, for two talks at a national advisors’ conference, to include The Rise of the Female Investor, where a highly unusual half of the audience was male. My unsettling chart showing males in the majority before age 50 rapidly declining to a dominant female majority at 50+, was entitled, “What happens in your 50s, do you suppose?” “Women,” a gentleman offered from the audience. Uh huh… Wednesday, when Trump announced his pause on reciprocal tariffs sans China, was a record-setting day with 97% of stocks on the NYSE rising. It was the tenth-best day for the S&P 500 ever, but big up days tend to appear during bear markets; two-thirds of the time, returns after explosive up-days are lower 65 days out. 22V Research sees the S&P 500 stuck mainly between 5,000-5,500 until the tariffs (including China) are at about a 10% average rate—assuming no recession. With a big fall followed by a violent relief rally, there’s usually a retest of the lows (85% of the time), occurring four weeks to four months later. If a recession took hold, the market would take longer to recover than if this remains an event-driven correction. Meanwhile, money market funds’ assets under management are at an all-time high, but as a fraction of the market cap of the S&P 500, levels are well below those seen in other major downturns, such as the Dot Com bubble, Global Financial Crisis and Covid. The speed of the decline may give a little solace. Corrections such as the current one where the S&P 500 falls 12% or more in less than 64 trading days have an average 12-month forward return of 21.4% vs. 4.1% for slower downturns. The American Association of Individual Investors bull/bear ratio is at the third-highest level ever (after the 1990 recession and the Global Financial Crisis)—bullish from a contrarian point of view. Also, the oversold conditions seen this week have only been exceeded in the past 20 years by Covid and 2008.

In March, tariffs were barely 2%; then came Liberation Day and its mix of reciprocal tariffs and 10% baseline tariffs. On Wednesday, the market soared on Trump’s hold-the-phone news. Still, the market sold off on Thursday. It’s not just the tariff rates making investors “queasy,” but also the uncertainty, together with a Fed that sees less cause to cut rates when the administration’s own policy is increasing inflation. As ships get turned back and ports slow down, the problems will spread from Wall Street to Main Street. The first glimmer of a de-escalation emerged when China said 125% would be its upper limit even if Trump raised tariffs yet higher. A glimmer, to be sure. Goldman Sachs, which had been bullish on the US economy, made a full round trip on Wednesday, first moving into the recession camp (65% probability) and then just an hour later, after Trump’s pause announcement, lowering the likelihood to 45%. Fundstrat says the risk is below 50%. Piper Sandler says, “Recession cancelled,” whereas Gavekal says a US recession is now very likely. Place your bets? Markets have discovered the Trump put and, in the event, it was the selloff in bonds rather than equities that brought it forth. The Fed put, however, remains elusive. As things stand, the market has entered an iceberg-filled sea; stagflation and recession fears and uncertainty will likely stymie corporate leaders’ plans.

The Laffer Curve shows that when tax rates go up past a certain point, receipts go down. That’s certainly the case with China tariffs—a 125% tariff is no worse than a 100% tariff, really, because both will result in little if any trade. If China expects this impasse to continue, then it will need to consider how to adapt—more fiscal stimulus is the most obvious path, along with structural reforms. Much will depend on how negotiations with other trading partners go—such as, the EU, Japan and Vietnam. The US will not only want to negotiate favorable trading terms with these countries, it will also want to steer them away from China. But the US would likely have less leverage for the latter the more it insists on the former. And Xi Jinping is visiting Vietnam. China may see Trump’s pause as a sign of weakness; from the US point of view, China’s retaliation looks like a mistake. In any event, the White House finally saw the bond market get, as Trump put it, “a little queasy” as yields spiked at a time when you’d expect them to drop. Even as a possible recession looms and fiscal imbalances stretch as far as the eye can see; it’s hard to imagine that the bond vigilantes are done. 90 days of uncertainty lie ahead—justification for minimal corporate guidance this earnings season. Reporting strong earnings, JPMorgan’s CEO Jamie Dimon warned of “considerable turbulence” ahead. I do love roller coasters. Doesn’t mean my portfolio should be treated like an amusement park, though!

Positives

• An inflation win, for now The headline PPI fell -0.4% in March (consensus +0.2%, prior +0.1%), a +2.7% y/y gain. Energy goods prices dropped -4.0% m/m and food prices declined -2.1% m/m. A possible window into weakening demand, international airfares fell -9% m/m, while domestic airfares declined -3.1% m/m. There was limited insight into the coming impact of tariffs, but at least we start from a benign level.
• More good news, if we can avoid a recession The March CPI data delivered a second consecutive month of downside surprise, as core CPI inflation decelerated to +0.06% m/m (+2.8% y/y), while headline CPI posted deflation of -0.05% m/m (+2.4% y/y), helped by a drag from energy prices. The tame report highlighted a potential new trend: a pull-back in leisure pricing power as airfares, hotels, car rentals, and recreation service prices all slipped m/m. Yardeni Research notes that shelter inflation is decelerating and could reach 3.0% y/y by year-end, historically consistent with the Fed's 2.0% inflation target.
• Stiff upper lip The minutes to the FOMC’s March meeting noted that “uncertainty about the net effect of an array of government policies on the economic outlook was high,” and that such uncertainty made “a cautious approach” to monetary policy appropriate. Still, the Committee was “well positioned to wait for more clarity on the outlook for inflation and economic activity,” against the backdrop of solid economic growth. 

Negatives

• Really worried consumers … The University of Michigan Consumer Sentiment Index for April dropped to 50.8 (57 previous), the second-lowest level on record, driven by broad-based fears of trade wars, inflation and jobs weakness. Expectations dropped to 47.2, the lowest since 1980. One-year inflation expectations surged to 6.7%, the highest since 1981. Sentiment has fallen 30% since December, suggesting fears of recession. Goldman Sachs notes that these interviews were conducted between March 25 and April 8, prior to the April 9 tariff pause announcement.
• … Are not in a home-buying mood Housing activity remains stuck in the basement and the latest rise in interest rates pushed 30-year mortgage rates back to 7%. The Fannie Mae home purchase sentiment reading slid to 68.1 in March, down 5.3% over the last 12 months. Studies show the measure to be a useful input in forecasting housing sales and starts.
• Post-election enthusiasm has evaporated The NFIB Small Business Optimism Index declined for the third consecutive month to 97.4 in March, below consensus (99.0) and the 51-year average of 98. The three-month decline of 7.7 points was the sharpest three-month drop since January 2021. Job openings remained high but plans to increase employment fell. The Survey was conducted in March, prior to President Trump’s reciprocal tariff announcement.

What Else

Trump “doesn’t watch the market.” Hmm Treasury Secretary Bessent has referenced President Reagan’s first term as a historical analogy. In Reagan’s first two years, the S&P 500 saw a 25% drawdown which was then followed by a 195% increase. Bessent emphasized that the tariffs are really aimed at benefiting "Main Street" rather than “Wall Street.”

Think Trump knows his history? The most significant US trade policies over the last 100 years were liberalizations in trade (at least for the US) versus restrictions, except for the Bush Steel Tariffs in 2002 and Trump’s similar section 301 tariffs in 2019. The McKinley Tariff of 1890 witnessed a 30% market decline in a six-month period. Prices soared and Democrats swept the mid-term election. Incidentally, we ran a trade surplus back then.

Make the markets boring again! After breaking the record for share volume traded on Tuesday, the S&P enjoyed its third-best day since 1950 on Wednesday. It also featured 99th percentile moves in both Magnificent Seven vs Defensives and yield curve flattening. The VIX posted its largest daily decline ever.