By Arthur G. Swalley, CIMA®, Partner, Chief Investment Officer
It was the worst of times, it was the best of times. Charles Dickens… reversed!
The Trump administration ushered in spring 2025 by threatening or imposing tariffs on goods from most countries, up to and including an island inhabited by penguins. The S&P 500 then fell by a combined 10.5% on April 3 and 4, the biggest two-day drop since the COVID-19 pandemic in March 2020. But, just a week later, on April 9, the index rose by 9.5% when the administration announced a 90-day tariff pause. Global equities then continued the upside trend amid policy shifts and delays implementing tariffs. The second quarter was only the worst of times for investors who sold their stocks based on the tariff threats!
April is the cruelest month. – T.S. Eliot, The Wasteland
With the return of significant volatility in the first half of 2025, the S&P 500 moved at least 2 full percentage points on eight separate days in April. Meanwhile, the VIX Index, a common measure of US stock market volatility, spiked to levels not seen in years, peaking at 52.3 on April 8. But the real cruelty was visited upon those investors who took the tariff threats as a serious sell signal. Trading on words, even when uttered by Presidents, without subsequent actions is clearly a poor way to run an investment portfolio!
We looked back at what bottoms mean for equity markets, and found that, according to JPMorgan research, if equities have a 20% correction, there’s only a 12% chance of having another 20% correction in the next 12 months. That’s a very low probability, meaning that unless there’s a true global shock, equities are not likely to go through another major downturn this year. The vast amounts of wealth created and stimulus money out there chasing fewer investable assets seems to have put significant floors under asset prices.
When and how do we think the almost 3 year upward trend of the stock market will change? Thanks to Jack Reacher at The Wall Street Journal, we might have some insight. In a July 5th article titled “Meme Stocks and YOLO Bets Are Back,” Reacher does a great job of explaining where we are in the stock market cycle:
“Since April 8 through late June the 858 unprofitable companies in the Russell 3000 Index with no earnings have since posted average gains of 36%, outperforming their profitable peers… and investors are now speculating like it is 2021.”
This kind of speculative excess, combined with outsized earnings growth expectations and lofty valuations, have often presaged subpar future returns. However, with corporate earnings continuing a steady upwards path, it appears that it would take a reversal – a few earnings misses – to trigger a sustainable downturn in the markets.
The Fed kept the federal-funds rate unchanged in the 4.25%–4.5% range in May and June, but warned that uncertainty about the economic outlook remained elevated. Fed Chairman Powell said that absent the yet unknown tariff effects, rates would likely be coming down. Turning to inflation, the US core consumer price index, which excludes more volatile food and energy items, showed prices rose 2.8% from a year earlier in June. The Fed’s target rate is 2%; it’s hard to see how a combination of tariff costs and steady corporate earnings and stock market gains can lead to the Fed lowering interest rates any time soon. After the election in 2024, we predicted increased uncertainty and volatility in the markets. In hindsight, it was an easy prediction, and one we hope will be wrong going forward. If we continue to be right, we believe our high quality, disciplined portfolios can weather the volatile times to come.