NEWS
What Happened Last Week
The S&P 500 jumped 9.52% on Wednesday, marking the 9th biggest up day in stock market history (with March 1933 still holding the record).
This resulted from President Trump pausing tariffs on recently targeted countries for 90 days, citing that more than 75 nations are seeking to negotiate with the US on trade policy.
Inflation, as measured by the Consumer Price Index (CPI), declined -0.1% in March; however, this was mainly due to the fall in gas prices, and core CPI (excluding food and energy) rose 0.1%, still beating expectations.
China experienced its second month of deflation in March due to the anticipated buildup of products which were originally meant for exports to the US.
China expressed it is open to negotiations based on “mutual respect,” but has raised its tariffs on the US to 125%, matching the tariffs imposed by the US on China.
For March, Purchasing Managers Indexes (PMI) in the US and across the developed world still indicate likely economic expansion is ahead.
So far in 2025, the US stock market has broadened its strength beyond just the Magnificent 7 (Apple, Nvidia, Microsoft, Amazon, Tesla, Alphabet, and Meta), with 62% of the S&P 500 index outperforming the index as a whole.
The Federal Reserve is now caught between the objective of keeping inflation low (using high interest rates) and potentially needing to fight future unemployment (using lower interest rates).
How I See It
It’s the job of stock markets to look ahead and weigh every probability based on current publicly available data.
The problem is that current available data is changing so rapidly. Neither businesses nor consumers know how to react to such quick and dramatic changes to the rules of the economic game.
Remarkably, fast changing rules are typical of the first half of a US President’s term, which often leads to volatile markets. This one has just been far more dramatic than most!
Should companies build their factories in the US when tariffs might be reduced or removed by the time they’re finished?
Would they have time to recoup the higher costs by the time that the rules have changed again?
Do consumers keep spending as usual, or do they start saving for a larger rainy day fund in case they lose their jobs as a result of cost cutting.
The problem with uncertainty is that it freezes people into indecision, or at least pauses otherwise productive decisions.
If this lasts for too long, it CAN create a recession.
I don’t believe that the tariffs alone would cause a recession.
But the constant uncertainty of whether they’re on or off, or how much they are, certainly could!
Add to that the narrowing profit margins of companies trying to compete for the lowest price hike, and recession becomes a growing probability.
The only way the sheer extent of these actions make sense to me is if there is truly a growing national security threat that needs to be dealt with right away. It’s not obvious to me that there is. But I’m not inside the Pentagon either.
Regardless, as with most fast-changing events, markets often overestimate the long-term market impact by reacting in the very short-term. Then they try to find their footing in the weeks ahead.
The 50-day moving average is just about to cross below the 200-day moving average on the S&P 500, one sign that the longer trend might be turning downward. In my opinion, downward movement in the days ahead is likelier than upside. Investors wishing to protect against a potentially longer term downturn could use this as a reasonable point to take action to hedge some risk.
A few methods of risk reduction* include:
-
Cashing in on some positions
-
Increasing bond-to-equity ratio
-
For equity allocation, using a more equal-weighted, large-cap index portfolio for diversification
-
Using an equity-linked CD
-
Buying a protective put option**
-
Establishing a vertical put debit spread
-
Establishing an option collar
-
Using a buffered ETF (typically held for ~12 months)
*This content is provided for educational purposes only and does not constitute financial, investment or legal advice. Investment decisions should be made based on each individual’s unique financial situation, goals and risk tolerance.
**Options involve significant risk and are not suitable for all investors. Before engaging in options trading, individuals should fully understand the risks involved and consider speaking with a qualified financial professional.