Stocks Plunge on Tariff Concerns; Bonds Rise Sharply
Good morning,
The Dow (-7.9%), NASDAQ (-10.0%), and S&P 500 (-9.1%) fell sharply last week. Conversely, taxable bonds gained about 1.1% and tax-free municipal bonds gained 1.8%. The 10-year Treasury yield fell below the 4% mark briefly but finished the week down 0.25% at 4.01%.
The 800-pound gorilla in the room was the announcement of steep tariffs by the Trump administration, which was then followed by retaliatory tariffs by several other key nations, notably China. As a result, we experienced a drop of about 10% in the final two days last week, the largest 2-day drop since the early onset of COVID in March 2020. Pre-market trading today is showing another sharp decline of 2% - 3%, too. The massive tariffs have caused many investors to fear that the tariffs will cause inflation, slowing economic growth, and a recession. Several renowned economists echo these concerns but also imply that the market reactions have mostly been due to uncertainty and, in one case, bringing the “expensive” markets to a more reasonable valuation.
Economic data reported last week was mixed, but clearly over shadowed by the tariff announcements. The Institute of Supply Management (ISM) indexes were slightly weaker for March, but jobs data came in strong. Key inflation data will be reported this week, and we are about to enter the start of the quarterly corporate earnings season. However, like last week, we can probably expect that data to be muted by any tariff announcements and rumors.
Dr. David Kelly, Chief Global Strategist at JP Morgan Asset Management, is a highly respected economist that we follow. In his weekly report this morning, he stated, “These much higher tariffs, if sustained, will provoke sharp retaliation and have the potential to trigger US and global recessions, boost inflation, increase inequality, slow productivity growth, and reduce corporate profits”. Dr. Kelly also noted, “Clearly, if we wanted to achieve trade balance, a better approach would be to reduce our budget deficit and try to work with other countries to reduce the exchange rate to a more reasonable level.” He also went on to say that we are at a pivotal point where the markets could move swiftly in either direction.
Dr. Kelly, along with our CFA consulting team, continue to re-iterate a common theme - stay diversified. They further state that going to cash after a sharp downward move like we are seeing could be a big mistake given the possibility of a market bounce from the recent selloff. To put diversification into perspective, the stock market (as represented by the S&P 500) was down 9.1% last week, and down 13.7% YTD. A moderate, diversified portfolio (assuming 60% stocks and 40% bonds) was down about 4% - 5% last week, and YTD. This demonstrates that diversification doesn’t prevent losses but usually softens the blow during sharp downturns.
Please note that I filmed a 30-minute video podcast with Brad Sorensen, CFA, last Friday. We normally post that on social media and various other media outlets on Wednesday, but given the circumstances, we have attached a link to the video below. We understand that times like this can be quite concerning, but we are nowhere close to sounding the alarm. If you have any questions or concerns, please do not hesitate to reach out.
First Quarter Recap & Tariffs with Brad Sorensen, CFA
Have a great day and terrific week!
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
