Published May 2, 2025
Stock markets have now fully recovered the Liberation Day panic while European and Japanese markets hit new highs. Have markets once again fallen into the great recession fakeout? As legendary investor Peter Lynch quipped, “The stock market has called 10 of the past 5 recessions.” The massive fear accompanying the Liberation Day announcement accelerated when President Trump threw shade on Fed Chairman Powell. The one-two punch of uncertainty sent investors running.
But that was so yesterday. Delta Research brings us current in their commentary below:
“The S&P 500’s -14.7% drop from April 2 (close) to April 7 (intraday low), and -21.4% from its February 19 high, reflected panic over President Trump’s Liberation Day tariffs (10% on most imports, up to 145% on China). The expectation was for tariffs to cause prices to increase and consumption to fall. Recession fear appears to have peaked when the CBOE volatility index (VIX) reached 60 on April 7 (fourth highest reading ever) and the high yield credit spread widened to about 4.6% from 3.4%.
If recession was the expected destination, the financial markets are signaling that the economy may be changing course. Rather than being down by about 15%, the S&P 500 is down roughly 1% from April 2. The VIX (fear index) has receded to the mid-20’s from 60 and slightly above the 21.5 average. The 10-year treasury rate has declined from a near-term peak of about 4.6% to 4.2%. The decline in the 10-year treasury rate suggests investors are less worried about inflation (and by inference, tariffs). The high-yield credit spread had pulled back to 3.9% showing the bond market has become more balanced in its view of recession probability.
The financial markets are signaling there may be headway in the de-escalation of tariff levels soon. The Chief Executive Officers of Walmart, Target and Home Depot met with President Trump at the White House to discuss tariffs on April 21. This week, the Hong Kong newspaper Ming Pao reported that Walmart, Target and Home Depot have asked their Chinese suppliers to resume shipments that had been suspended recently due to tariff uncertainty. The newspaper says that the U.S. retailers agreed to cover Trump’s 145% tariffs.
Like the financial markets, the Ming Pao report suggests that investors may see some favorable tariff news within a time frame that would mitigate the probability of a recession in the U.S.
Market Update
Investors looked to build on the prior week’s strong rebound as the calendar turned from April to May this week, while four of the market’s biggest, most influential stocks were set to post earnings. Monday saw flat trade ahead of those reports. A reduction in tariff impacts on automobiles combined with welcome earnings news from a flurry of Dow Industrial components to lift stocks +0.6% Tuesday. But a negative first quarter GDP report issued Wednesday morning sent stocks sharply lower to start that day’s trading. The 2-3% morning downswing was reversed in the afternoon, however, a welcome response for the bulls. The parsing of the GDP data showed a huge surge of imports ahead of the tariff implementation to be the primary cause of the negative print. Strong earnings reports from Microsoft and Meta powered stocks Thursday to kick off the month of May with a +1.5% rise in the Nasdaq. A solid monthly jobs report kept the mood positive Friday despite a downdraft in shares of Apple following an uninspiring earnings outlook. Shares of Amazon likewise sparked no buying after a similarly cautious earnings forecast. Nonetheless, the Nasdaq overcame that lack of help to close higher by +1.5%.
Stocks posted a second strong weekly advance to recover all of the early April losses. The S&P 500 (SPY) rose +2.93% while the Nasdaq 100 (QQQ) added +3.44%. Small cap stocks (IWM) joined the upswing with a +3.28% gain.
Warm wishes and until next week.