Stocks Rally Sharply on Tariff Delays; Bonds Plummet
Good morning,
The Dow (+5.0%), NASDAQ (+7.3%), and S&P 500 (+5.7%) rose sharply for the week. Conversely, taxable bonds fell 2.5% and tax-free municipal bonds fell 4.0%. The 10-year Treasury yield rose a stunning 0.46% to finish the week at 4.47%.
The market has clearly demonstrated that its main focus is on tariffs and the potential for trade wars. It started on Monday when the markets rocketed on a rumor of tariff relief, then dropped back down once that rumor was squashed. Then on Wednesday, President Trump announced that the US would delay the large tariffs for 90 days, except for China. The markets immediately jumped around 10%, the largest daily gain in stock market history.
The huge tariffs on China and their reciprocal tariffs have initiated a trade war with China again. However, there are hopes (expectations?) that many of the other countries around the world will attempt to negotiate new trade deals with the US, and cause more stability in the markets. Until then, the word on the street will continue to be UNCERTAINTY, which can create volatility and downward pressure on markets. Further, the uncertainty of tariffs will also play a big role in the upcoming earnings season, as CEOs will be reluctant to project earnings for upcoming quarters.
Economic news has been dwarfed by the tariff rumors. However, good economic news last week emerged from the monthly inflation report – Consumer Price Index (CPI). The CPI for March was lower than economists’ expectations, as inflation fell for the month, and year over year was the lowest reading since 2021. However, it should be noted that these readings came before the tariff announcements, so the forward-looking numbers could change. That said, lower inflation numbers give the Fed room to cut interest rates if economic growth slows, rate cuts typically create some stimulus. Remember that the Fed has a balancing act of trying to keep inflation low, but also to keep the job market strong, and those two tend to counter each other.
At this moment, the US economy remains on strong footing, despite several economists’ concerns of a forthcoming recession. A forward-looking indicator of the US economy is the unemployment claims numbers. The chart below shows the 4-week average of initial jobless claims, which is currently 223,000. A level of 375,000 – 400,000 is typically indicative of a recession.
4-Week Moving Average of Initial Jobless Claims
*Source: CPR, YCharts
At this point, the markets can be expected to remain volatile until there is more clarity on the tariffs. Of course, this is easier to say than do, but try to remain calm and not panic. As a basis for comparison, remember the 35% market drop (in 5 weeks) at the time of COVID when the US effectively shut down its economy for months. We are nowhere near that level of fear and concern, and the Fed took action to pull the US out of what could have easily become a prolonged recession. The markets finished in positive territory for the year, too.
Have a great day and terrific week!
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