Weekly Market Bites

end of week markets update

1) Its been another tough week for financial markets as the direction of travel continues downtown.

But not everything sucks. International equities, Gold and US treasuries are winning.

So, who’s up, who’s down, and what’s next? All of that and more below:

2) The Economy and financial markets are going through a (Trump) uncertainty shock.

Everyone was expecting a pro-growth, business-friendly environment that would send markets soaring. Instead we got a curve-ball.

Now nobody knows how far Trump will take tariffs, fiscal policy, confrontations with allies as well as adversaries.

In fact as I was writing this a new tariff was announced with the EU 🍷 🍾 

And, its unclear how US counterparts are going to retaliate.

U.S. trading partners aren’t exactly sitting there, sipping tea, and taking it quietly.

As the Wall Street Journal put it, they're “not taking his tariffs lying down.”

So, what’s happening to the economy?

Here’s a perfect summary:

It’s too early to see major effects in the economic data. But some leading indicators and surveys are looking funky:

On the left: potential inflation risks. On the right: weakening business confidence.

We’ll see how this plays out.

How have financial markets reacted?

At the index level, we are in a 10% drawdown in the S&P500. Which is your typical correction that statistically happens almost every year:

No need to panic yet.

One interesting thing to think about: some of the worst performing stocks have been the MAG-7. Not the stocks actually affected by tariffs.

Which shows how market sentiment is what is really being hit hardest. And taking down the AI momentum bull market with it.

What Should We Be Watching to Know What’s Next?

Watch market volatility, measured by the VIX index.

Why? Because volatility and stock market returns move in opposite directions.

If we continue to see wild swings of +- 1% days in the S&P500 and closes above a 27 VIX, then shits gonna continue to go down. Now If things calm down were probably head back higher:

What are companies signaling:

Analysts have dropped S&P500 earnings expectations by 8% in the 1st quarter.

That’s a big air pocket.

And for the bull case to stay intact earnings would then have to recover 21% to close the year, as things calm down. Seems ambitious. But who knows…

3) While the S&P500 is going down other parts of the global stock market are doing much better.

Year-to-date (EFA) International developed stocks and (EEM) International emerging stocks are beating the S&P500 by more than 10% in relative terms.

In fact, this might be the strongest start for international stocks relative to the S&P 500 in ages 😁 

🤣 

But before you start believing the “International is back” market commentators, don’t forget: over the past 1, 3, 5, and 10 years, global stocks have been getting dunked on by the S&P 500:

Either way, this is why you diversify globally my friends.

You never know when the USA vs International cycle is going to flip.

4) From now until the end of the year anything can happen.

But unless we get a recession, odds are that the we finish the year less than 10% down on the S&P500.

In the last ~100 years there have only been 4 times when the S&P500 was down 10% for the full year and it was not related to a recession:

Also, at some point the Trump policies that are good for markets will also kick in:

Either way its good to be Grandpa Buffett holding a lot of cash right now 🤣 🤣 

charts

Japanese bond yields are reaching levels not seen in decades:

Why is this important? Japan is one the largest holders of US Government Treasuries. If their domestic bonds keep getting attractive they could become big sellers of UST.

Making the job of bringing down 10-year interest rates in the US that much harder.

Retail investors are heading for cover in Gold.

The growing market uncertainty is pushing billions into Gold ETFs. Adding more fuel to the historic bull run which about to touch $3,000/ounce for the first time.

Relative to stocks, Gold is on the best run of the last four years 🤑 

Not bad for a shiny hunk of metal that has no cashflows.

And finally, some parting wisdom