John E. Chapman
Chief Executive Officer
Just a week ago, I sent out my April Private Client Letter in which I explained what appeared at that time to be an orderly market correction of just 10%. My commentary went on to express my worries that the challenges the markets were facing were mounting, including the tariff announcement scheduled for the very next day.
In addition to offering details related to my concerns, I observed how I believed it is premature to be searching for a market bottom. I even went a step further in writing:
“We believe there are times to lean into opportunity and then there are times when minimizing mistakes and protecting capital can lead to superior outcomes over time. We believe this may be a time to protect capital.”
In case you missed this important communication, you can read this commentary in its entirety here.
Volatility in the equity markets kicked into high gear following the announcement of broad-based unilateral tariffs, and stocks went on to deliver their worst week since the global pandemic-induced market carnage in March 2020. The Dow Jones Industrial Average (DJIA) ended the week with a loss of 7.86%, while the S&P 500 (SPX) dropped by 9.08%. The tech benchmarks Nasdaq Composite (NDAQ) and Nasdaq-100 (NDX) tumbled by 10.02% and 9.77%, respectively.
By Monday afternoon, U.S. stocks were attempting to find some stability following a wild ride in and out of positive territory. On Tuesday, the markets appeared to stabilize in early trading. Investors are confused over the impact tariffs will have on the global economy, and no one knows exactly how the many crosscurrents will play out. Uncertainty is at the heart of recent market volatility, and until these many uncertainties begin to recede, investors can expect the markets to remain frustratingly choppy.
Eventually, attention will move past tariff fears and the Trump economic policies widely believed to be pro-growth in nature will come back into focus. Tariffs are just one element of President Trump’s economic policy agenda – albeit a particularly disruptive element. Lower taxes, deregulation, and domestic energy development are much less controversial and should bring about a degree of optimism as progress is made in these critical areas. Still, I do not believe Investors should expect a quick recovery in equity prices.
The central debate regarding tariffs is over the desired end game. From my perspective, I believe the President is employing tariffs to achieve maximum leverage in ultimately negotiating more equitable trade agreements with different trading partners throughout the world. At the time of this writing, more than 70 countries are believed to have contacted the White House to discuss how an escalating trade war might be avoided.
While I thought for many months that the economy was becoming increasingly vulnerable and market expectations were running far too high, I believe investors have overreacted to the tariff story. U.S. equity markets had already entered correction territory, having declined by about 10%, when the tariff announcement was made. Market volatility over the days that followed was comparable to what we experienced when the COVID pandemic first spooked investor confidence. Much of the tariff-related selling appeared to rival the panic selling in March 2020.
This selling pressure has brought the S&P 500 to levels of fair value with the price-earnings multiple approaching 15x 2026 earnings estimates. Very quickly, the markets have become deeply oversold. Equities may be volatile at times like this; however, stocks still represent the best hedge against inflation and the best asset class for long-term wealth accumulation.
As the markets ultimately find a degree of stability there are several possible catalysts that could shift investor sentiment and send U.S. equities back into rally mode:
- First, trade deal negotiations may quickly accelerate. As mentioned above, a number of countries are communicating a willingness to negotiate tariffs with the United States. If successful, other countries could follow in short order with similar engagement. Should this happen, the “worst case” perception of tariffs could quickly begin to fade. Negotiated deals will be challenging, however, as the issue extends beyond tariffs alone to include non-tariff barriers such as currency manipulation, artificial product standards, and various government subsidies. Still, a de-escalation of tariff concerns would be a significant catalyst to U.S. equity prices to recover.
- Second, the Fed may soon have an opportunity to cut interest rates. Inflationary pressures could subside quickly with an estimated $6 to $8 trillion loss of market value in this selloff. The wealth effect is real and when people feel poorer, they rein in spending, and this has the potential of sending inflation down. Markets are now betting on three or four rate cuts from the Fed in 2025, with a first reduction coming as early as the Fed’s next meeting on May 17th. Lower inflation opens the door to lower interest rates, and this would likely be a positive catalyst for U.S. equities.
- Third, Congress is inching forward in extending Trump’s tax cuts. Both the House of Representatives and the Senate have passed resolutions enabling Republicans to use the reconciliation process aimed to make the 2017 Tax Cuts and Jobs Act (TCJA) permanent. The House and Senate resolutions differ in their spending cut requirements and debt ceiling increases, which must be reconciled before final legislation can proceed. Legislative support of this Trump policy priority would also be seen as a positive catalyst for U.S. equities.
- Fourth, President Trump may yet have a surprise move to make. The record of President Trump’s view on tariffs is clear. He is on record in saying “No tariffs, no barriers. That’s the way it should be.” in 2018 to a Group of Seven meeting in Quebec. In an opinion commentary piece in the Wall Street Journal, presidential economic advisors Arthur Laffer and Steven Moore have suggested that President Trump give a televised address to magnanimously announce to the world that the U.S. is ready to drop all tariffs and industry subsidies to zero with any nation that does the same. While it is impossible to know if President Trump would follow his advisor’s lead with such a move, doing so would certainly allow Trump to regain the moral high ground on this issue and likely send stock prices higher.
Of course, these developments have yet to happen and the level of nervousness amongst investors is running quite high. Economists are predicting the risk of a recession will climb significantly if the tariff problem persists into the summer. I agree, and for this reason, I do not believe President Trump will push this issue beyond what may be necessary for him to gain the negotiating leverage he may be seeking.
Just six weeks ago, the S&P 500 stood at record levels, with stocks moving higher with strong momentum. Today, investors are reeling with tariff concerns and a spike in market volatility. Uncertainty will continue to drive market volatility until it gives way to clarity. The central thesis of our Outlook 2025 report is that it would be a transitional year as the new administration moved aggressively to reform numerous economic policies simultaneously. This indeed is happening, and this is what disruption looks like.
