The S&P 500 has rallied 14.5% for twenty trading sessions, embedded within it one of the longest consecutive-day up-streaks since 2004. This advance, where popular indices have now fully retraced the losses triggered by the April 3rd selloff and marched beyond and the NASDAQ Composite rebounded off the 2021-top level, resembles a ninja-style speed-mounting up a wall of worry which bricks consist of everyone’s favorite tariff chaos, recession fears, potential threat towards the USD reserve currency dominance, and an endeavored ousting of the head of the Federal Reserve system.
Despite the momentous index rally, individual equities remain muted and the macro picture remains murky. GDP growth was negative for the first time since early 2022, business (PMI, NMI, SBOI) and consumer (UoM, Conference board) indices are in contraction and/or near multi-year Lows, and the manufacturing sector is front-loading imports in anticipation of tariffs.
On top, unemployment is trending off the Lows and jobless claims are above forecasts. The Leading Economic Index has been consecutively dropping, while commodity markets are semaphoring a drop in economic activity (e.g. energy, copper, steel). All this is happening while the Fed, clearly seeing these signs, is staying tight in their monetary regime due to expectations of a future flare-up of inflation due to raised tariffs.
Equity markets so far remain in a bear market, despite the rally. While the downward trendlines are being challenged, keep in mind that as of yet, we need to see an end to this violent bounce, a drop back to support, and then prices on all major indices to sustainably and permanently cross beyond the Highs of the first rally, all while witnessing a swath of new stock leadership emerging. No prior bear market in the States has ever been this short in contraction when looking at cross-index confirmation using Dow theory (and that includes the COVID crash!).
As well, note that all selling off the February top was on rising to heavy volume, whereas rallies were violent in nature but displayed relatively weak volume – signaling weak demand, reflexive retailer buying, overall equally typical of bear markets.
History teaches us that bear market rallies can be some of the strongest in magnitude. But they don’t necessarily indicate a fundamental shift in trend. Portfolio risk adjustments such as seen in April, often causing bear markets, typically precede economic recessions, and have done so on the majority of occasions in history. The current rally should therefore be seen as part of a broader process, not an endpoint.
The future impact of current trade policy remains unknowable. No one can accurately forecast the net economic impact of aggressive tariff strategies wielded by a whimsical and unpredictable individual in an already strained economic and political environment. Tariffs are essentially taxes, and their cost is often de facto passed on to consumers. While some argue that tariffs could theoretically reduce prices by cutting imports, that would only occur under highly specific and unlikely conditions, i.e. bilateral tariff eliminations, or total demand collapse.
No use in worrying – observe, react, position.
So long,
TGS
