April 4, 2025
Good morning,
Unfortunately, it is all too clear this morning that April 2 was, to quote Winston Churchill, “the end of the beginning rather than the beginning of the end.” Early this morning, China announced extra 34% tariffs on U.S. goods. As of 7:30 am, Futures have declined ~4% in the 90 minutes since China’s reprisal hit the tape. When the dust settled yesterday, this was the biggest risk over-hanging yesterday’s almost -5% decline in the S&P 500 Index – tariff negotiations.
Negotiations among sovereign nations are not easy to watch, and it’s almost impossible for public markets to accurately price (discount). Uncertainty was high leading up to Wednesday’s tariff announcements. They are higher now. The VIX (uncertainty index) has doubled from the start of the week and is at 43 this morning – a “scared” zone not seen since Covid. There is some solace in that last sentence – this self-inflicted tariff war is not Covid.
Updating the technical picture of the market, a thread in Morning Notes over the past month; yesterday’s decline broke below the 3/13 low and violated the 4-step rule for confirming a bottom. That bottoming process has to begin again. Recall that condition #1 is a deeply oversold market – we’re there already today. Step #2 is a new low, which is what we’ll need next. When the free-fall stops, we’ll likely have our new low. Bottoms to a waterfall decline are often accompanied by cathartic, exhaustive, panic selling. Yesterday’s selloff was as orderly as it gets for a 5% decline, with an unusual amount of advances suggesting more rotation in equities than “get-me-out” selling. This morning shows signs of panic in the VIX and other markets, namely fixed income but in commodities too.
While it was a shocking surprise, we learned of the magnitude of the new tariff program yesterday = market down 5%. This morning, we get an equally surprising reprisal = market down another ~5% (in big round numbers). Again, in round numbers, the wailing you hear is the S&P getting close to down ~20%. Does down 20% discount the likely global recession that may follow yesterday’s “Shock and Awe” announcement? Probably if it is not a deep recession.
Even if down 20% is the bottom, ultimately, it is going to take many days of watching prices move up and down and probably with big swings to put that bottom in. I believe the market knows the downside risks in nature, if not the exact number. Are there any upside risks?
*Tariffs likely move down from here – the market doesn’t need good news on tariffs, just less-bad news to stem the tide of selling
*The Fed takes rates lower – not by a lot, but a small cut directionally would help the healing narrative
*Tax cuts are agreed to at larger-than-expected levels
*Deregulation efforts begin accelerating
It is not over in terms of bullets flying back and forth for the next week, but I believe we have the magnitude of the damage to markets in view at this point.
Be well,
Mike