An Attempted Reset

Is The Stock Market Crash Over?

Well, that was a week!

President Trump’s Liberation Day resulted in a lot of value being liberated for investors’ portfolios. His trade plan included a more aggressive set of tariffs than the market was expecting and included stiff levies against major trading partners, such as China and the European Union. While some countries, including Vietnam, are already talking about striking deals, others, such as China, have countered with their own retaliatory tariffs, making a bad situation for risk assets even worse.

All of the traditional warning signals are starting to flash now. The VIX touched 45 on Friday. High yield spreads are beginning to blow up with Thursday’s spike representing one of the largest single day moves higher in the past 30 years. Traditional risk-on/risk-off has fully returned. Long bonds were up nearly 4% on the week, while the S&P 500 lost 9%. One reaction worth noting is that the dollar moved higher even as Treasury yields moved lower. That tends to be a less frequent occurrence and one that usually happens in a risk-off environment. The dollar begins getting viewed as a safe haven even as the yield on dollar-denominated assets drops.

What I think we’re clearly seeing here is an attempted reset to steer economic growth away from being funded by government spending and more towards being driven by the domestic private sector. I keep hearing the phrase “short-term pain, long-term gain” being used, but I don’t think that’s necessarily the case. The market clearly sees longer-term recession and earnings risk happening here. Valuations are being sucked lower, as they should be, and Q2 is probably going to be littered with earnings revisions lower. This week was just the announcement. Once we start getting indications of how this will impact corporate plans, consumer behavior and the labor market, that’s where I think we potentially get the extended bear market.