Published April 4, 2025
The market turbulence reached a higher gear this week. Our friends at Delta Research provide an overview of the market inputs below:
“Since the presidential election, there has been a whirlwind of U.S. government policy changes. Rapid change creates investor uncertainty. The chart below shows how economic policy uncertainty recently reached the third highest level in the past 40 years.
The primary driver of economic uncertainty has been evolving tariff policy. This week on Wednesday, the U.S. tariff policy was clarified. Tariffs are set to reach the highest share of GDP in 100 years. We have most likely passed the point of peak uncertainty regarding tariffs and now the financial markets are adjusting.
The argument in favor of tariffs is they should incentivize manufacturing to return to the United States in the intermediate and long-term. For investors today, the eventual success of the tariffs will not be known for some time.
In the near term, the financial markets are pricing in a higher probability of recession. One of the primary measures of investment risk for fixed income investors is the High Yield Spread which has remained near record lows from the November election through about a month ago. Although the economic uncertainty index spiked, the credit market remained relatively complacent as the hard economic data remained biased towards growth.
As tariff activity has intensified over the past month, credit spreads have begun to widen. The chart below reflects the spread-widening through Wednesday morning. Given the “flight to safety” in government bonds on Thursday, we expect the spread to have widened further when next reported.
The spike in the spread indicates elevated recession risk. As of Wednesday morning, the interest rate spread between non-investment grade corporate debt and U.S. treasuries was 3.4%. Spreads above 5% have coincided with equity market volatility and depreciation.
Other barometers of economic activity are showing a deteriorating condition. The price of West Texas Intermediate (WTI) crude oil declined 7% on Thursday. The consumer discretionary sector ETF (XLY) is down 15% year-to-date with a 6% decline occurring on Thursday.
The pace of change remains high. Retaliation, escalation or reconciliation could come next. As measured by the CBOE Volatility Index (VIX at ~28), the higher-than-expected tariff rates have not caused investor panic. The stock market is repricing, in a relatively orderly manner, a broader array of possible economic outcomes.”
Market Update
Stocks posted a strong positive reversal Monday as investors tried to position for the Trump Administration’s “Liberation Day” tariff announcement scheduled for April 2nd. The S&P 500 rallied to a +0.6% close after being down well over -1% earlier in the session. The day closed a difficult month of March for stocks with investors trying to determine the possible impacts of the various tariff announcements.
Tuesday saw the usually strong month of April begin with a +0.4% gain. Stocks added a third day of gains Wednesday with another +0.7% move as investors continued to hope for a lighter touch on tariffs in the “Liberation Day” announcement coming after the market close. Investors were disappointed, however, when the tariff announcement proved far more widespread and harsh than expected. Futures immediately sold off leading to a substantial gap down at the market open Thursday. Stocks closed with -5% losses on the day. Friday would prove even worse as liquidity-related selling hit virtually all sectors of the market. China’s retaliatory tariffs stoked fears of a global economic recession sending investors to the exits. Huge volumes were seen across the entirety of the market. The S&P 500 closed at the lows of the day down -6% in the market’s worst two-day move since Covid.
A crisis week for stocks as investors hit the sell button hard leaving the S&P 500 (SPY) down -9.07% for the week. The Nasdaq 100 (QQQ) plunged -9.87%. Small-cap stocks (IWM), since their glorious post-election pop, have now given back four year’s worth of effort falling -9.61% this week.
Warm wishes and until next week.