Has the Storm Passed, or Is This the Eye?

It’s becoming clear that we’ve weathered a major market storm.  The key question is whether the danger has passed, or if this is instead a temporary lull.  Bear in mind that market prognostication is even more error-prone than weather forecasting…

If you’ve ever experienced being in the eye of a hurricane, it’s a profoundly weird experience.  It happened to me once, fortunately during a not-particularly damaging storm.  The wind dies down, the rain ends, and the sun briefly reappears.  It appears the danger has passed, but then the rain and wind resumes, though from the opposite direction.  Considering that market participants don’t have the luxury of satellite imagery or the ability to fly a plane into the storm, we’ll have to do our best with the information at our disposal.

All things considered, it would be great if we could proclaim an “all clear” with certainty.  From last Monday’s low to Wednesday’s high, the S&P 500 (SPX) had rallied over 13%.  We’ve yet to recoup last week’s peak, but we are certainly much closer to those highs than the recent depths. 

On the other hand, we are also about 13% below SPX’ peak of February 19^th.  It is reasonable to think that some damage would have been done by the tariff gyrations.  The market had already begun to fall before the “Liberation Day” announcement, and we remain about 4.5% below the SPX close of April 2^nd.  Again, this is reasonably commensurate with the on-again, off-again nature that has followed the shocking initial tariff announcement, the ratcheting of tensions with China, and the 10% baseline / 90-day pause with most of the rest of the world. 

But now what?  The Treasury Secretary calmed jittery bond markets with comments yesterday that “I don’t think there’s a dumping” of Treasuries by foreign investors.  While I don’t disagree with his comment that much of the selling was the result of “deleveraging” – I think that applied to stocks as well as bonds and currencies – I don’t think that he adequately explained why the US dollar would have otherwise plunged along with Treasuries.  Both bonds and the dollar improved modestly this morning, but not nearly enough to undo last week’s moves.

Furthermore, it is difficult to expect the recent plunges in consumer sentiment to improve markedly and immediately.  If those persist, the negative vibes could offer their own headwind to the economy via reduced spending and higher inflationary expectations.  If nothing else, we don’t have clarity as to what might happen after the 90-day tariff waiting period ends, so it is difficult to expect consumers to quickly reverse their gloom.

A difficult series of budget negotiations also looms.  While there are certainly hopes for “one big beautiful bill”, it will require some difficult lawmaking ahead of a ticking clock.  Barring a debt ceiling deal, the Treasury could run short of funds as early as mid-July or as late as October.  We’ve averted most government shutdowns, so while that outcome is unlikely to occur, it certainly will make the process far more fraught. One also must wonder if the hoped-for tax cuts are possible in light of less-than-hoped-for tariff revenue and DOGE cuts.  Pushing though tax cuts could cause foreign investors to face mounting debt concerns, while failing to do so would dishearten hopeful domestic investors.  Appeasing both groups would require some very deft lawmaking.

Had we quickly given back last week’s gains, it would have been easy to suggest that we had seen a short, sharp, and ferocious bear market rally.  Now, with the gains holding and volatility decreasing, it seems more like we have found a new short- to medium-term trading range.  That relative calm could of course be the result of both exhaustion and a holiday-shortened week (we will be closed for Good Friday).  There is no shortage of potentially stormy weather on the horizon, but those concerns have diminished markedly in recent days.