By Pete Biebel, Senior Vice President, Senior Investment Strategist
Picture a group of cavemen staring upward as a comet streaks across the night sky. I wasn’t actually there, but I imagine their speculation about what that thing was, and what that omen might have meant about the future, was very similar to the plethora of musings and guesses and theories about the Liberation Day tariff policies that swamped news media last week. Sadly, with so many unknowns regarding actual tariff levels – how long they’ll be in place, how often they might change, and what tariffs foreign countries might impose on U.S. products – the media talking heads have about as much chance of getting it right as the cavemen.
Everyone who doesn’t live in a cave is now painfully aware of Wednesday afternoon’s tariff announcements. At least for the time being, those announced tariffs are much higher than expected, as were China’s new retaliatory tariffs. What we do know is that the higher tariffs will necessarily have a greater economic impact than had previously been expected. Many economists were quick to raise their probability of a U.S. recession this year to above 50%. The larger-than-expected negative economic impact of the tariffs will certainly lead to reduced earnings expectations, which in a richly valued market, can be very harmful to stock prices.
I don’t want to reinvent the wheel, but the fact is that it’s far too soon, and there are still far too many unknowns, to have any confidence in calculating the specific impact the tariffs will have on individual industries and companies. However, what we do know is that inflation will likely increase, earnings will likely decrease and the economic growth in the United States and around the world will likely slow if not decline into recession. That not good.
Even if you do live in a cave, you probably heard that stocks sold off savagely last Thursday and Friday. I’m a bit of a dinosaur myself, but I suspect it was one of the steepest, short-term declines since the Paleolithic era. The sell-off or revaluation of equities in light of the tariff news isn’t surprising, but the size and speed of that revaluation has been shocking. For the week, the S&P 500 Index (SPX) fell about 9%. The NASDAQ Composite Index (COMP) lost about 10% with the technology sector (-11.6%) leading that index lower. All 11 sectors were in the red for the week, with defensive sectors, consumer staples (-2.4%) and utilities (-4.4%), losing the least. Nearly 40% of the S&P 500 stocks lost 10% or more last week, and 18 S&P stocks lost more than 20%. Only 24 stocks had a net gain for the week. The number of New York Stock Exchange stocks that declined last week outnumbered advancing issues by more than a 14-to-1 ratio.
As we tried to decipher the market’s hieroglyphics in recent months, we kept coming up with the same message: The market is very expensive; we should expect substandard returns over the next few years. The easy money era that inflated the prices of stocks and most other assets is over. We cited the “Buffet Indicator,” the cyclically adjusted price-earnings (CAPE) ratio and the equity risk premium (or lack thereof) as evidence of the overvaluation. I used an analogy to a Hawaiian booze cruise in my last article to warn investors that a hangover from the excesses of recent years may be in our future.
In addition to stocks being on shaky ground fundamentally, the market’s technical condition had been deteriorating for months. In my market commentary for our advisors last Monday I wrote, “Regular readers will recall that I had been of the opinion that taking out the SPX 5800 level would indicate that an intermediate-term top had been seen. SPX has now spent the past three weeks below the 5800 level. Now, the more immediate concern is the potential for additional losses this week. Taking out that 3/13 low (5504) would confirm that an important high had been reached and that the index is now solidly in a corrective phase. In that event, there would be the risk of steep additional losses as the extreme negative bias of that technical condition is recognized.”
Even with last week’s steep losses, most investors are still way ahead of where they were a couple years ago. That may be a small consolation as the recent market devastation has investors questioning the most appropriate course of action now. We urge you to avoid the extreme urges. This is not the time to sell everything, nor is it the time to jump in aggressively. In fact, we wouldn’t want to be too aggressive until the investing public becomes much less aggressive. On Friday, a J.P. Morgan report revealed that retail investors, during Thursday’s market decline, “…not only bought the dip but did so at a historic pace.” The report states that retail investors “…ended today with +$4.7B of net buying, the largest level over the past decade.” As a contrary indicator, that not good.
Even well-diversified, long-term investors may feel as though they’ve been knocked back to the Stone Age. Don’t panic. The cost of good years like 2023 and 2024 is the occasional set-back. Just as portfolios should be rebalanced following large market gains, so too should they be rebalanced following large drawdowns. But there’s no rush. Let the dust settle. Sit back and watch until the current extreme volatility subsides, then reevaluate.
My primitive assessment of our future economic prospects is that the current tariff kerfuffle has distracted attention from a couple other potentially mammoth issues that had been front-page news a couple months ago. One is certainly the risk of escalating geopolitical conflict. Remember Ukraine? Russia? Israel? Gaza? NATO? China? Taiwan? Those issues haven’t gone away, we just stopped talking about them. The other stegosaurus in the room is the looming debt ceiling negotiations and what steps might be taken, if any, to control the country’s massive fiscal deficit and the runaway federal debt. The wrong sort of developments on either issue could exacerbate an economic slowdown at precisely the wrong time. What would happen if the U.S. Federal Reserve lowered its overnight lending rate in response to an economic slowdown and long-term interest rates remained elevated?
The next couple weeks will probably see big price swings in both directions. The market averages are all oversold on both a short-term and a long-term basis. Any rebounds will be rallying through a vacuum, so a little push could go a long way. SPX ended last week near 5074, just below its low from last August. A quick rebound rally could easily lift SPX back into the 5400–5500 range, but probably not much further. Due to the extreme negative momentum, lower lows are likely in the coming weeks. Based on historic trading levels and long-term moving averages, SPX could eventually decline into the 4700–4800 range.
Later this week, we’ll get updates for the Consumer Price Index and the Producer Price Index. Regardless of any small change in one direction or the other for last month, we know that, in the months ahead, those metrics will probably tick higher as the tariff impact is reflected in the data. Later this week, we’ll also see the first quarterly corporate announcements of the new earnings season. Where the composite earnings per share (EPS) of the S&P 500 had been expected to increase by about 10% year-over-year, recent signs of slower economic growth, now compounded by sky-high tariffs, have led several analysts to reduce their EPS growth estimates to the very low single-digit percentages. Here too, the first-quarter data will reflect pre-Liberation Day performance. The more important information in the reports will be the forward guidance offered by individual companies regarding how they expect tariffs to impact future results.
| Economic Calendar (4/7/25 – 4/11/25) | Previous | Consensus | |
| Monday 4/7/2025 | Consumer Credit, February, | $18.1B | $15.5B |
| Tuesday 4/8/2025 | NFIB Optimism Index, March | 100.7 | 99.0 |
| Wednesday 4/9/2025 | Wholesale Inventories, February, M/M | +0.8% | +0.4% |
| FOMC March Meeting Minutes | |||
| Thursday 4/10/2025 | Initial Jobless Claims | 219K | 2XXK |
| Continuing Claims | 1,903K | 1,884K | |
| Consumer Price Index, March, M/M | +0.2% | +0.1% | |
| CPI ex-Food & Energy, March, M/M | +0.2% | +0.3% | |
| CPI ex-Food & Energy, March, Y/Y | +3.1% | +3.0% | |
| Friday 4/11/2025 | Producer Price Index, March, M/M | 0.0% | +0.2% |
| PPI ex-Food & Energy, March M/M | +0.2% | +03% | |
| PPI ex-Food & Energy, March Y/Y | +3.3% | ||
| Consumer Sentiment, April | 57.0 | 55.0 | |
Links to previously published commentaries can be found at benjaminfedwards.com/Latest Investment Insights/Market Commentary/Market