April 21, 2025

QuickTakes

Damage Assessment

Stock prices fell sharply today in response to President Donald Trump's recent unseemly barrage of hostile tweets directed at Fed Chair Jerome Powell. Trump seems to be setting Powell up to be the fall guy if Trump's Tariff Turmoil (TTT) causes a recession later this year. Also unnerving stock prices was a warning from Beijing to all its trading partners against succumbing to US pressure to isolate China in Trump's tariff war, as part of its carrot-and-stick approach to win over countries caught between the world's two largest economies. "China firmly opposes any party reaching a deal at the expense of China's interests. If such a situation arises, China will not accept it and will resolutely take reciprocal countermeasures," a Chinese government spokesman stated.

Let's assess the latest damage resulting mostly from TTT:

(1) The VIX was relatively high today. The yield spread between the high-yield corporate bond composite and the 10-year US Treasury bond is widening, flashing orange about the rising odds of a credit crisis resulting from the stress of TTT on the financial system.

(2) The S&P 500 remains in correction territory with a 16% drop since February 19. It is likely to retest its April 8 low and probably find support there. If so, then the market may be forming a bottom.

(3) The Nasdaq was down to 15,870.90 today nearing a retest of its bear-market low on April 8. It is now a bit below its previous bull market peak at the end of 2021.

(4) On a ytd basis, the 10.2% decline in the S&P 500 has been led by a 21.9% drop in the Magnificent-7. The S&P 493 is down just 5.2% so far.

(5) The forward P/E of the Magnificent-7 plunged about 10ppts since the end of last year from roughly 32 to 22 currently. Over this period, the forward P/E of the S&P 500 has dropped about 4ppts from 22 to 18.

(6) The US Dollar Index has dropped roughly 10% since the start of this year. It is likely to test and find support at the uptrend line that started in 2011.

(7) American Exceptionalism has been most apparent in the global outperformance of the Magnificent-7 stocks in recent years. Foreign investors rushed into them and bolstered the Dollar Index. So far this year, the bear market in the Magnificent-7 may be the main reason for the weakness in the dollar. They are both overdue for rallies.

(8) The outperformance trend of Stay Home relative to Go Global is still intact.

(9) The price of oil remains depressed signaling weak global economic activity while at the same time slightly boosting the purchasing power of consumers around the world.

(10) Gold has been a great hedge against the damage that TTT has been doing to stock portfolios so far this year.

(11) The Chinese government bond yield remains very low suggesting that Beijing's attempts to offset the depressing economic impact of TTT are not working.

(12) The correction in the S&P 1500 has been widespread since February 19.

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