Elevated Levels of Macro Uncertainty Due to Volatile Trade Policy
The title above tells you everything you need to know. We’re in this soup until we’re not. But the current market downdraft and the frenetic news cycle has several points worth looking at as we move forward in the 2nd quarter.
The recent tariff-related selling in the market has been well documented and unpleasant. The S&P 500 is down 2.5% since the April 2nd “Liberation Day” and it’s down a total of 9.9% since its all-time high reached on February 19th. The low point in the tariff-induced selloff was on April 8th with the S&P 500 down 18.8% from its Feb 19th high. Somehow the drawdown we’ve experienced feels worse than most. Perhaps it’s because you could argue that it’s been an unforced error. The rapidness and severity of the selling since Feb 19th are very unsettling to the system. However, what tends to get overlooked in that wording is a very important note in all of this disruption: the S&P 500 in mid-February was at an all-time high. And that was reflective of a healthy economy that’s still very close to full employment. Bloomberg’s 1.4% projection for 2025 GDP growth represents the median of 79 economists. In other words, all is not lost and we are not dealing with an unavoidable structural or systemic problem as we did in the Great Financial Crisis or the Dotcom bust.
The key questions now are to what degree do the tariffs impact inflation going forward and to what extent does all of the elevated uncertainty impact consumers, businesses large and small, and the overall economy. And the answer to those questions is that no one knows and it may just be premature to render judgment. We’re going to have to see how the various trade negotiations go in the weeks and months ahead. Until then, when we’re hearing constant debates on the probability of recession, what is stagflation and how bad will it be, and is Trump going fire Fed Chair Powell and what this would mean for the bond market, etc. – these are all examples of distracting interference and are mostly not helpful to investors. They might be helpful to macro hedge fund traders, but not to investors. I would remind the reader that the S&P 500 was up 26.3% in 2023 and 25% in 2024, and on Feb 19, 2025 it was trading at 26.6x expected earnings over the next twelve months. This compares to its ten-year average multiple of 20x.
It’s worth noting that on April 8th the VIX, also known as the “fear index”, closed over 50 for only the third time in its history. The other two times it’s been over 50 were during the GFC and Covid. We may have seen the maximum level of tariff-induced fear in the markets on that date. Correspondingly, the VIX has now moved below 27 and over the past five years it has averaged 20.6. The St. Louis Federal Reserve Bank Financial Stress Index 4.0 is another metric than informs us on the level of financial stress in the system and is helpful when thinking through this current volatility. It’s constructed from eighteen weekly data series using interest rates, credit spreads, and other metrics. In the past couple of weeks it reached about the same level that it was during the 2022 Fed rate hiking cycle (chart below), but has since moderated lower. This suggests that the announced tariffs to-date have had a similar impact as the Fed’s rate hiking mode (to slow economic activity) in 2022. Further, we would note that high-yield and investment-grade credit spreads, although elevated from recent tights, are still well below levels reached in the 2022 rate hiking cycle.
As we’ve seen in the last few days, it only takes a comment from the White House to spark a rally, to only then be reversed by another report with a different wording or take. This only makes the current backdrop more volatile and challenging to absorb. This reinforces the idea that one needs to look through or around the noise and think in terms of where their positions will be in three or four years instead of where they will be in the next three or four months. A good example of looking past the distracting volatility and news cycle is our recent commentary, Despite Tariffs, Artificial Intelligence Remains The New Economy’s Growth Driver.
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