Weekly Investment Perspective

By several measures, the last two weeks have marked one of the most eventful stretches in market history including one of the largest historical one-day stock rallies on Wednesday in response to the Trump Administration’s 90-day pause on reciprocal tariffs after a brutal sell-off in the prior week. Amid the continued stock market turbulence, a sharp slide in the U.S. dollar and a sell-off in U.S. Treasury bonds that sent yields surging have left investors on edge as these are usually seen as safe haven ports in a market storm. The S&P 500, Dow Jones, and Nasdaq Composite all notched gains of over 5% last week, and the positive momentum has carried into this week’s early trading, following news from over the weekend that certain electronic goods, including smartphones, PCs, and semiconductors, are exempt from the broad tariff rate imposed against China; however, they will be subject to different tariff rates to be announced within the next few months, so they are not out of the woods entirely. The highly dynamic nature of these trade announcements and the volatile market responses are an important reminder of avoiding knee-jerk investment decisions and staying disciplined with a long-term perspective.

While investors cheered the brief reprieve from the pause on reciprocal tariffs, the trade war with China is far from over. In the U.S., universal tariffs of 10% and an increase in the trade duties against China to 145% have gone into effect, pushing the effective average U.S. tariff rate above 20%. China has responded in-kind with retaliatory tariffs on U.S. goods of 125% and moves to cut off exports of rare earth materials that are critical to development of a broad array of electronic components. The rapid trade war escalation has accelerated the push to sever the economic ties between the U.S. and China, which will have significant long-term ramifications. As the two economies have become intricately bound over the past several decades, it will take time to unwind and redraw global supply chains and many business leaders are unwilling to commit to any substantial investments while the future policy outlook remains so unclear.

Amid the deluge of trade and market headlines last week, the slump in the U.S. dollar and the surge in U.S. bond yields caught the attention of many market observers. The U.S dollar index fell 3.3% and the 10-year Treasury jumped over half percent to close just shy of 4.50% last week, both of which are unusually volatile moves in such a short period. Such a move was even more notable in the context of last week’s cooler than expected inflation readings, falling economic growth expectations, and elevated stock market volatility, all of which tend to drive greater demand for long-term Treasury bonds and push rates down. Instead, the rise in yields has been attributed to a lack of market liquidity as international buyers may be more hesitant to absorb the growing pile of U.S. government debt amid current geopolitical tensions. An unwind in levered hedge fund bets may have also played into the upward pressure on rates. However, the bond back-up bears watching closely as it raises borrowing costs for households and businesses and puts pressure on the federal government during international trade negotiations.

Despite the recent market turmoil, several members of the Federal Reserve have expressed confidence that markets continue to function normally with sufficient liquidity. Susan Collins, head of the Boston Fed, noted on Friday that the central bank is “absolutely prepared to stabilize markets if needed.” Aside from rate cuts (which the market now forecasts at 3-4 cuts this year), the Fed has other tools in its tool chest to support markets if conditions worsen, including the ability to step in as a bond buyer if liquidity seizes up as it did during the pandemic.

In the week ahead, investors will turn their attention to first quarter corporate earnings season, which kicked off last week with well-received reports from several financial bellwethers last week including J.P. Morgan, Morgan Stanley, and BlackRock. While the S&P 500 is expected to have seen earnings growth of over 7% year-over-year in the first quarter, investors will be much more interested about the forward-looking outlook than on this past quarter’s results. Management commentary will be important for helping to gauge the uneven impact of tariffs across the economy, though many executives may choose to pull forward looking guidance amid the uncertain backdrop.

As always, we will keep you apprised of our thoughts on the dynamic policy environment and the implications for markets and the economy in the weeks ahead. Please don’t hesitate to reach out if you have any specific questions or concerns about your financial plan and investment portfolio.

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