“BREAKING: Treasury Secretary Scott Bessent says he will meet with Chinese officials in Switzerland to begin trade talks with China.” A month ago, when markets were grossly oversold, news of trade discussions between China and the US would have sent markets soaring. However, now with the market slightly overbought, the S&P 500 doesn’t seem to care about the discussions. This leaves an important question: why is the market not more enthusiastic about the coming talks? We present three possibilities:
- Already priced in: The S&P 500 graph below shows the steep decline on Liberation Day when Trump announced tariffs. Additionally, the graph shows the sharp rally a week later following the 90-day suspension of tariffs. The market has since rallied further, assigning higher odds of beneficial tariff reductions and agreements. Might the lack of significant upside tell us the market has largely priced in the news?
- Trade agreements take time: While we may see some deal blueprints over the coming weeks and months, actual trade agreements will take much longer. Because trade with China is complex and the relationship is thorny, any blueprint or eventual deal will take longer than with other countries. Might the market be discounting the benefits of any agreement and worrying about the economic impact in the meantime?
- Market calling BS: For the last two weeks, Trump and members of his cabinet have been promising specific trade agreements within days. Despite the promises, we have no trade agreements. Might the recent disappointment be causing investors to question the validity of the news?
What To Watch Today
Earnings
Economy
Market Trading Update
In yesterday’s update, we discussed the market’s short-term trading support levels. The first was the 50-DMA, which the market bounced off of yesterday morning following news that China had agreed to trade talks.
However, if we scale out a bit, we continue to track the 2022 market correction. While I am not a fan of analogs, as market environments differ from period to period, the comparison supports the concept of bear market rallies within a corrective or consolidation period. As noted yesterday, the markets continue to reside under the 200-DMA, which will provide overhead pressure to rising prices. The concept is vital for investors to understand that not all rallies immediately return to all-time highs.
Notably, the weekly technical gauge is also trending in the same pattern as in 2022. As with the price chart above, it is worth noting that while reverting from extreme oversold conditions, the technical conditions did not reach the bullish exuberance stage seen before the beginning of the 2022 correction.
The takeaway for investors is that while the recent rally from the lows was robust, with a sharp improvement in breadth, many were trapped in the selloff. As such, there is a decent probability that they will likely exit the market quickly at the first sign of a risk return. As such, while bullish sentiment is returning swiftly, it is worth repeating that investors should use this recent rally to reduce risk and rebalance allocations. Even if markets do not retrace to retest lows, the probability of a short-term pullback far exceeds the possibility that markets push back to all-time highs.
While anything is certainly possible, rebalancing some risk will likely pay dividends in the near term.
The Fed Worries About Stagflation
As widely expected, the Fed left rates unchanged and didn’t further reduce QT. However, they added a critical line to the last meeting’s statement. The committee believes the risks of stagflation (higher inflation and unemployment) have risen. As they note, this is due to tariffs and the economic uncertainty they create. Consequently, the odds of a rate hike at the June meeting fell from 50% to 30%. Moreover, the market ascribes a 75% chance of at least one cut by July.
The following comments and quotes are from Powell’s conference:
- Price changes due to tariffs could be short-lived or persistent.
- The current policy stance is “well-positioned” to respond in a timely way to economic developments. They are waiting for more clarity on tariffs before reacting. “The costs of waiting are fairly low.” “We can move quickly when appropriate.“
- Powell and the Fed appear concerned that current tariff rates will remain. If they are lower, the Fed’s inflation concerns will diminish.
- He stressed that they cannot predict monetary policy until the tariffs and their economic impacts reveal themselves. “There are cases in which it would be appropriate for us to cut rates this year, and there are cases in which it wouldn’t, and we just don’t know.”
- Poor sentiment survey data has yet to show up in hard economic data. He did acknowledge that if poor sentiment continues, it could likely show in economic data, and “that may be what happens.”
- “We don’t need to give Congress budget advice, just like we don’t need their monetary policy advice.”
The Storm Before The Calm
Risk management is critical to wealth preservation, especially in today’s turbulent market storm. However, during such volatile times, we must also not consider what tomorrow may have in store. Are you prepared to adjust your portfolio in the coming months for the possibility that calm, tranquil markets and a resumption of the bullish trend emerge?
While not front of mind for many investors today, Trump’s other economic agenda items could be bullish for stock investors after the tariff storm passes.
Accordingly, let’s discuss a few items on Trump’s agenda that, if enacted, could benefit corporate bottom lines, the economy, and, ultimately, help us look past the stock market storm.
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