All Clear?
“Unch,” the S&P 500’s year-to-date level is close to being unchanged and yet we’ve experienced nerve rattling amounts of volatility since April. But stocks have rallied as tariffs have been put on pause until July 9th. It’s almost as if nothing happened. Are all those sources of volatility now in the rearview mirror? The details within the backdrop of the current market show that not to be the case, but that does not leave the astute investor without options.
From mid-February to April 8th, we had a sharp tariff induced market selloff of nearly 20%, which was followed by a market rally of 20.8% in about two months’ time. Has everything been settled in regards to trade? This may be the collective wisdom of the market, which is simply recognizing that the trade issue will be worked out and everything will be great. Possibly. But, it’s presumptuous to assume that such complex trade issues will be settled in such a short amount of time. Normally, it takes many months, or even years, to get a single trade deal settled. That being said, the market will have to adapt to the fact that these trade negotiations will be going on for many months to come. And it’s fairly safe to say that we will continue to have to deal with elevated levels of domestic policy uncertainty from Washington. The markets will be keenly focused on the most consequential remaining trade deals – those with the EU, Mexico, and Canada. The trade deal that was reached with China was received by the markets as largely a non-event. Perhaps this is because it didn’t resolve the trade imbalances between the two countries, but it did allow for the rare earth shipments to resume for the next six months in exchange for Chinese students to attend US universities.
Meanwhile, business owners in the US are being either directly or indirectly impacted by all of the trade uncertainty. This led to some pull-forward in ordering of final goods and inputs in the last several months in anticipation of the tariffs announced in early April, and it’s also meant that some business owners currently are pausing hiring and purchasing until there is further clarity on prices. This, in turn, has led to modestly slower job growth, which likely isn’t disappointing the Fed in its quest to continue to cool inflation. However, the Fed isn’t presently interested in cutting interest rates, because of the real possibility of tariff-induced higher prices over the next couple of quarters. So, they have indicated that they are in wait-and-see mode for the time being.
Within this essentially “unchanged” equity market, individual investors continue to display speculative enthusiasm for momentum stocks and crypto assets. And the two are clearly trading as risk-on assets. Momentum stocks for the year are up 11.4% and Bitcoin is up 12.5%, while the S&P 500 has climbed only 2.1%. During the recent tariff induced selloff, they were down 20.8% and 20.3%, respectively, compared to the S&P 500’s -18.8%. Contrast this with the S&P 500’s biggest downdraft all of last year of only -8.5%, from July 16th to Aug 5th. Momentum stocks declined by 12.9% and Bitcoin by 18.1% during that span in 2024. It is important to recognize this when building portfolios for the long haul: the popular, themed assets, including the Mag 7, have shown themselves to be more volatile (and expensive) than the broad market. The unloved, mostly ignored S&P 493 is trading for a 20.8x multiple, while the Mag 7 trade for 30.6x. We continue to find value in growth-at-a-reasonable-priced stocks in the 493 stocks that aren’t quite as popular with the risk-on momentum crowd.
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