{"id":222763,"date":"2025-04-25T11:15:00","date_gmt":"2025-04-25T15:15:00","guid":{"rendered":"https:\/\/ibkrcampus.com\/campus\/?p=222763"},"modified":"2025-04-28T03:46:55","modified_gmt":"2025-04-28T07:46:55","slug":"whither-the-rally","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/macro\/whither-the-rally\/","title":{"rendered":"Whither the Rally?"},"content":{"rendered":"\n<p>What a week.&nbsp; After beginning it with a -2.4% drop in the S&amp;P 500 (SPX) on Monday, that index was up +3.8% for the week through yesterday.&nbsp; That\u2019s one heck of a reversal.&nbsp; Since then, the most frequent question that I\u2019ve been asked is \u201cwhy the huge rally and how long might it last?\u201d&nbsp; There are several reasons, which we will attempt to elucidate below.&nbsp;<\/p>\n\n\n\n<p>There were several reasons why the rally was well deserved:<\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li><strong>Market friendly messaging<\/strong>.\u00a0 Investors finally got the sense that the President who viewed the market as a barometer of his job performance has returned.\u00a0 Remember, the post-election rally was predicated upon:<\/li>\n<\/ol>\n\n\n\n<ol style=\"list-style-type:lower-alpha\" class=\"wp-block-list\">\n<li>A market friendly Administration<ol><li>Deregulation<\/li><\/ol>\n<ol class=\"wp-block-list\">\n<li>Tax cuts<\/li>\n<\/ol>\n<\/li>\n<\/ol>\n\n\n\n<p>Items (b) and (c) did not prove to be the immediate priorities of the administration, and the first major economic policy that was implemented \u2013 tariffs \u2013 was &nbsp;not something that most investors neither wanted.&nbsp; Then, to make matters worse, its rollout was not well handle.&nbsp; Then, when President Trump initially dug in on tariffs rather than assuaging market concerns, it was very jarring for investors.&nbsp; He has since amended his approach, and stocks appreciate it.<\/p>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>More Bessent, less Lutnick and Navarro<\/strong>.\u00a0 Yes, like Treasury Secretary Bessent, Commerce Secretary Lutnick is also a Wall Street guy, but his style of messaging and public embrace of the ill-fated \u201cLiberation Day\u201d announcement was not loved by investors. \u00a0\u00a0Even though it was reported that Lutnick joined Bessent in appealing to the President to pause tariff implementation, it is clear that investors prefer the Treasury Secretary\u2019s sober delivery than the Commerce Secretary\u2019s histrionics.<\/li>\n<\/ul>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>We were VERY oversold<\/strong>.\u00a0 In circumstances like that, we can \u2013 and did &#8212; easily flip from one extreme to another<\/li>\n<\/ul>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>Companies are getting a relative pass.\u00a0 <\/strong>In recent quarters, failing to meet guidance almost certainly led to a nasty selloff.\u00a0 But thanks to the tariff uncertainty,they have been able to waver on guidance as long as they don\u2019t overtly cut it.\u00a0 If there is a plausible to do so, managements are being allowed to push off negativity until next quarter.\u00a0 That is allowing analysts to continue to price in double-digit earnings growth for the S&amp;P 500, and if that is achievable \u2013 a big \u201cIF\u201d \u2013 then we\u2019re not overpriced<\/li>\n<\/ul>\n\n\n\n<p>Yet there are still valid reasons for caution.&nbsp; Those include:<\/p>\n\n\n\n<ol class=\"wp-block-list\">\n<li><strong>Bear market rallies are short, sharp and ferocious<\/strong>.\u00a0 Keep in mind that some of the biggest rallies in history <a href=\"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/macro\/bear-market-rallies-are-short-sharp-and-ferocious\/?query=bear%20market%20rallies&amp;query_id=sQO0PwveSy6brvbg5Lt9DA&amp;index=engine-name-placeholder&amp;user_token=sQO0PwveSy6brvbg5Lt9DA\">occurred during bear markets<\/a>.\u00a0 FOMO is always a powerful motivator, so once traders get the sense that they might miss a rally, they dive right in. (OK, the bear market in SPX lasted for maybe a few minutes, but it was substantial nonetheless.)<\/li>\n<\/ol>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>The volatility of the recent move is not necessarily a sign of enthusiasm \u2013 it can also reflect uncertainty<\/strong>.\u00a0 Just because this is \u201c<a href=\"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/macro\/socially-acceptable-volatility\/?query=socially%20&amp;query_id=kY6ydmmESZintnfqtDNNhg&amp;index=engine-name-placeholder&amp;user_token=kY6ydmmESZintnfqtDNNhg\">socially acceptable volatility,<\/a>\u201d it\u2019s still volatility, nonetheless.\u00a0 And volatility is the manifestation of uncertainty.\u00a0 Remember how one of the features of the recent bull market was how rare it was to see outsized moves in either direction.\u00a0 We literally went years without a 2% daily move.\u00a0 Now they come almost daily.\u00a0 The former reflected consensus, the latter ongoing uncertainty.<\/li>\n<\/ul>\n\n\n\n<ul class=\"wp-block-list\">\n<li><strong>The earnings forbearance can\u2019t last<\/strong>.\u00a0 Barring a major change in tariff policy or an incredibly rapid array of bilateral trade deals, companies will eventually see concrete effects of tariffs and will no longer be able to forestall changing guidance.\u00a0 It would mean that the market\u2019s expectations for 2025 earnings are far too high.\u00a0 Bear in mind that when markets were plunging, it was too quick to know exactly whether it was multiple contraction shrinking the P\/E ratio or earnings expectations implicitly contracting.\u00a0 It was probably some of each.\u00a0 But if earnings expectations are getting reduced, the major indices will suffer.<\/li>\n<\/ul>\n\n\n\n<p>This morning\u2019s activity is not giving us many clues about whether the rally is likely to continue or pause.&nbsp; So far today, traders seem more interested in digesting a wild week rather than taking on new positions.&nbsp; It\u2019s hard to blame them.&nbsp; I\u2019ll be watching to see if the afternoon brings profit-taking, another attempt to goose the market higher, position squaring stasis, or some combination of some or all of them. &nbsp;I suspect that position squaring will win out, especially because the President will be on a plane for Italy and unlikely to provide any market catalysts.<\/p>\n\n\n\n<p>We got the latest UMich numbers as I was typing this.&nbsp; The good news is that the sentiment (52.2 vs. the prior 50.8 and 50.5 consensus) and 1-year inflation expectations (6.5% vs. the prior 6.7% and 6.8% consensus) were better than feared, but the bad news &#8212; and reality &#8212; is that they still stink.&nbsp; They\u2019re a reminder that the economic backdrop remains highly uncertain, and thus so will the markets.&nbsp; This leads me to think that selling rallies is the better path than chasing them.<\/p>\n\n\n\n<p><\/p>\n","protected":false},"excerpt":{"rendered":"<p>What a week.\u00a0 After beginning it with a -2.4% drop in the S&amp;P 500 (SPX) on Monday, that index was up +3.8% for the week through yesterday.\u00a0 That\u2019s one heck of a reversal.\u00a0 Since then, the most frequent question that I\u2019ve been asked is \u201cwhy the huge rally and how long might it last?\u201d<\/p>\n","protected":false},"author":4,"featured_media":222609,"comment_status":"open","ping_status":"closed","sticky":true,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[14700,18,6,8,9,26,3],"tags":[19274,19272,16328,19273,19271],"contributors-categories":[13576],"class_list":{"0":"post-222763","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-ibkr-market-insights","8":"category-macro","9":"category-north-america","10":"category-region","11":"category-securities","12":"category-text-articles","13":"category-traders-insight","14":"tag-bear-market-dynamics","15":"tag-investor-caution","16":"tag-stock-market-rally","17":"tag-tariff-impact-on-earnings","18":"tag-volatility-and-sentiment","19":"contributors-categories-interactive-brokers"},"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"<!-- This 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