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WEEK AHEAD
April 28-May 2, 2025
Technical indicators have improved from the troughs, temporarily, as volatility has come down, but given the 3 weeks of ups and downs, normalization is far from settled. Our trend-following signals cautiously remain in neutral territory (60/40) until further notice.
If global markets were a movie theater this week, investors would still be munching their popcorn during the trailers, nervously awaiting President Trump's main feature: "Tariff Wars: The Final Act." Yet, in classic Wall Street fashion, the absence of any shocking news footage proved to be the best news. Equities staged a sharp rebound, slicing into April's prior peak-to-trough losses—more than 10% since the so-called "Liberation Day" of April 2—with the S&P 500 rising +4.6% this past week, its third consecutive week of gains.
However, a closer reading reveals a more complicated subplot: the S&P 500's broad gains are masking a sharp bifurcation beneath the surface. Tariff exemptions for key industries—particularly semiconductors—sent growth stocks soaring. Big Tech led the charge, with growth stocks surging +6.5%, outpacing their value counterparts by an eye-popping +3.82%. Month-to-date growth stocks have remarkably clawed back into the green (+1.54%), while value stocks remain firmly underwater (-4.47%). All Magnificent-7 names participated enthusiastically, reflecting investors' selective optimism around tariff carve-outs.
Some of the market's buoyancy owes to a subtle but critical shift in tone from the White House. President Trump's rhetoric toward China softened—likely helped by a confluence of unflattering realities: a weakening U.S. dollar, the historic low of his 100-day presidential approval rating, and the fastest collapse in consumer sentiment and economic forecasts seen since the pandemic era. In Thomas Friedman's views, it turns out that globalization and domestic politics are more tightly fused than even the tariff hawks imagined.
The economic backdrop, however, continues to deteriorate under the surface, whispering warnings that all is not well:
Layered atop these signals was a dire warning from the International Monetary Fund: global growth is faltering under the weight of tariffs. The IMF slashed its 2025 U.S. growth forecast to just +1.8% (down from +2.7% in January), warning of an "80% collapse in U.S.-China merchandise trade" should tensions persist—a grim scenario painted by Director-General Ngozi Okonjo-Iweala in her sobering April 9th address.
Meanwhile, the bond market continued its whipsaw dance. Recession fears overtook inflation worries for the week, pulling Treasury yields lower. The 10-year note slipped 5 basis points to 4.29%, while the 30-year bond yield dropped 6 basis points to 4.74%, helping the Bloomberg U.S. Aggregate Bond Index notch a +0.69% return.
Looking ahead, this week's earnings from corporate bellwethers—Microsoft, Meta, Qualcomm, Coca-Cola, Apple, Amazon, McDonald's, Exxon Mobil, among others—will set the tone for equities. Yet make no mistake: short-term market swings will hinge on Washington's trade negotiations, while signs of stagflation will increasingly shape long-term positioning. Key economic data on GDP, unemployment, and the Fed's preferred inflation measure—the Core PCE—will be critical inflection points before the Fed's next meeting on May 7.
While President Trump's evolving playbook this week—marked by a softening stance toward China—provided markets with some welcome relief, a note of caution came from Treasury Secretary Scott Bessent's remarks at the Institute of International Finance on April 23. Bessent struck a more hawkish chord, warning, "China, in particular, is in need of a rebalancing. Recent data shows the Chinese economy tilting even further away from consumption toward manufacturing. China's economic system, with growth driven by manufacturing exports, will continue to create even more serious imbalances with its trading partners if the status quo is allowed to continue. China's current economic model is built on exporting its way out of its economic troubles. It's an unsustainable model that is not only harming China but the entire world." As the administration attempts to walk a political tightrope between market-friendly de-escalation and structural confrontation, the gap between the rhetoric and underlying tensions remains a key risk—and the real feature presentation may yet be ahead.
"It was like America and China were two elephants looking at each other through a straw. Having just been there two weeks ago, I would say now they're like two elephants looking at each other through a needle. The aperture has just gotten tiny."
– Thomas Friedman, Ezra Klein Show, April 15, 2025.
Trading on Fear: Understanding Policy Shockwaves Moving Through the Markets
"Whipsaw movements in country tariff rates will do nothing to reduce already record levels of trade-policy uncertainty. Trump appears to consider uncertainty a positive for negotiations. For businesses and markets, it's a drag."
— Economists Rana Sajedi, Maeva Cousin, and Tom Orlik @ Bloomberg Economics
Like many investors over the last few weeks, we've fallen into a new morning routine: checking the US equity market futures to see whether it's likely to be an "up 3%" or "down 3%" day. Such extreme volatility has seemed to be the only certainty for stock investors facing a daily stream of updates and commentary on Trump 2.0 tariffs, the reactions of America's trading partners worldwide, and the impact all of this will have on the economy and markets.
Of course, it's not unheard of for stocks to witness big daily gains and losses. Looking at the last 65 years of S&P 500 Index trading activity, spanning over 16,000 trading sessions from 1965 through the end of 2024, we find that the S&P 500 has experienced moves of at least 3% up or down on exactly 241 occasions. In other words, just about four "big days" per year. To put things into perspective, we've witnessed four such days—a whole year's worth—in just one calendar week following the Trump administration's April 2nd "Liberation Day" announcement of broad US tariffs.
That kind of jarring uncertainty is also showing up in the VIX "fear index", which tracks implied volatility in S&P 500 options, giving us a real-time gauge of equity investors' anxiety. Over the last decade, the VIX showed average expected volatility for the S&P 500 of roughly 18%: a relatively tranquil state for a "risk asset" like common stocks. In the week following Liberation Day, driven partly by those big up and down days we just mentioned, the VIX surged to over 50% annualized volatility before settling in at just over 30% in the last week.
So far, we've been thinking about uncertainty in the markets: investors trying to determine what a trade war might mean for corporate earnings and the price of companies' shares. Behind those stocks, there's a more fundamental type of uncertainty, with consumers and companies' managers wondering where in the world tariffs will land when all is said and done. Uncertainty over the fundamentals of trade is even more pronounced than market volatility.
We can actually visualize the fear around Trump 2.0 tariffs quite easily, thanks to Professors Scott Baker, Nick Bloom, and Steven Davis, a group of economists at Northwestern and Stanford, who statistically analyze keywords in the text of over 2,000 US newspapers to chart different types of economic policy uncertainty. When we plot their measures of uncertainty specifically related to trade, we find that although Donald Trump's first term was already record-breaking in terms of trade stress, the economic shock of the second term has been positively off the charts.
Trump 2.0 tariffs push trade policy stress to historic highs
Chart: Trade Policy Uncertainty Index, Jan. 1995 - Mar. 2025
Source: Rayliant Research, using index published by Bloom, Baker, and Davis, as of Mar. 31, 2025
Looking at the chart above, with an eye-popping break from the norm—quite literally ripped from the headlines—it's easy to see why investors have been collectively freaking out, herding out, or piling into stocks from one day to the next. On the other hand, it's worth remembering that financial and economic uncertainty like that we've discussed and plotted above likely doesn't last forever. Historically, it often hit unexpectedly; it tended to come in clusters, but it eventually resolved, often just as unexpectedly.
That can be a challenge for market timers attempting to dip in and out at market bottoms and tops, but it's good news for those who stay fully invested. When one zooms out, episodes of volatility like the one we experienced in April 2025 are often barely discernible on a chart. Remember those statistics around the S&P 500 we referenced earlier? The total return to US stocks over those 65 years—complete with 122 "down days" of at least 3%—comes to around 10.4% per annum: a cumulative 64,000%. That is not a bad performance for an investor willing to buy and hold through those volatile patches that arise from time to time.
Disclosure: The reader should not assume that an investment in the indexes described above was or will be profitable. The opinions contained herein are subject to change without notice and should not be construed as investment advice. Past performance is not indicative of future results.
Advisory services offered through Sowell Management, a Registered Investment Advisor. The views expressed represent the opinion of Sowell Management. The views are subject to change and are not intended as a forecast or guarantee of future results. This material is for informational purposes only. It does not constitute investment advice and is not intended as an endorsement of any specific investment. Stated information is derived from proprietary and non-proprietary sources that have not been independently verified for accuracy or completeness. While Sowell Management believes the information to be accurate and reliable, we do not claim or have responsibility for its completeness, accuracy, or reliability. Statements of future expectations, estimates, projections, and other forward-looking statements are based on available information and Sowell Management’s view as of the time of these statements. Accordingly, such statements are inherently speculative as they are based on assumptions that may involve known and unknown risks and uncertainties. Actual results, performance or events may differ materially from those expressed or implied in such statements. Investing in securities involves risks, including the potential loss of principal. While equities may offer the potential for greater long-term growth than most debt securities, they generally have higher volatility. International investments may involve risk of capital loss from unfavorable fluctuation in currency values, from differences in generally accepted accounting principles, or from economic or political instability in other nations. Past performance is not indicative of future results.