Upheaval has been the norm as the past week has brought significant change in headlines on a day-to-day basis. What seemingly began as a global nuclear trade war may be quietly transitioning to a singularly focused, all-out economic battle for the U.S. and China.
There were early indications of this again when the administration increased tariffs to a crippling 145% on China while simultaneously announcing a 90-day suspension of reciprocal tariffs on most other nations.
Consequently, China raised its tariffs on U.S. imports to 125% while also seeing the Chinese yuan drop off a cliff to a new 18-month low. This has caused some to warn that China may begin to devalue their currency sooner rather than later as a defense mechanism.
There no doubt will be ripple effects from a singular trade war with China. But if deals begin to be announced with other friendly nations, allowing the velocity of money to pick up, we at Cornerstone don’t expect the recent lows to be retested. However, that doesn’t mean there won't be short-term fluctuations in the markets over the next couple of weeks.
That said, last week there were positive developments, when a delay was announced in the collection of Chinese reciprocal tariffs. This points to further de-escalation of some tariff war impacts and is generally positive for five main reasons:
1. De-escalates overall tariff impacts.
2. Provides China room to also de-escalate while saving face.
3. Gives time for U.S. multinational companies to make corrective actions.
4. Creates a positive option value for tariffs to be less punitive and possibly even help U.S. corporations.
5. Shows there are more measured voices at the table.
This shift in tone builds on other positive signals.
One is the 90-day targeted tariff delay. Another is positive commentary from the Federal Reserve regarding liquidity, which reassured equity markets. Also, the recent tech exemptions for specific Chinese imports provides additional cover for Chinese officials to begin to reciprocate in kind.
The most important signal supporting this view was the fact that the CBOE Volatility Index (VIX)* – dubbed the market’s “fear gauge” – closed below 31 last Monday after surging to 60 less than a week prior:
Looking back to 2008 and 2020 (the only two other times the VIX topped 60), stocks had already bottomed by the time the VIX fell back below 31:
Combine that with Treasury Secretary Scott Bessent’s comments indicating his belief that volatility peaked last week, and it supports historical precedence that when the VIX drops below 50, it’s usually the beginning of tactical buy signals.
Bessent began providing additional clarity when he divulged that current trade talks are focused on historically strong allies like the United Kingdom, Australia, South Korea, India, and Japan. That list offers a reliable blueprint for mutually beneficial deals, further emboldening a path to de-escalation.
Still, that doesn’t mean we’ll avoid short-term volatility. Through last Wednesday’s rough session, the S&P 500# fell by 2.2% and the Nasdaq Composite Index^ fell more than 3%.
But the current environment still finds that headlines, not fundamental developments, are driving market moves. Earnings season can’t get here soon enough.
In our opinion, while these pullbacks are disappointing, they’re not surprising. Plus, the market is in a better place than when it was probing 4,800 lows. Since we’re not in a “normal” market currently, we see headlines pressure equities, like last week:
1. Semiconductor giant NVIDIA announcing a $5.5 billion charge due to restrictions on its H20 chip sales to China.
2. The U.S. is negotiating with over 70 nations to not allow China to ship goods through their countries to the U.S. to avoid tariffs.
3. Fed Chairman Jerome Powell said the central bank is in “wait and see mode.”
Do these headlines ,all of a sudden, fundamentally cut the value of U.S. stock market by $1 trillion, meaningfully increase the odds of a U.S. recession, or increase the risk of higher inflation?
We would argue they do not.
But do these headlines make investors nervous? Yes.
The point is stocks fell because markets got nervous, which was reflected in the VIX rising to 32. The fact that it “only” rose to 32 is a significantly better sign comparatively than when it reached 40, and even better than when it reached 60:
Taking all this into account, even after all the volatility, equity markets’ overall footing has improved over just 10 days ago. That’s even more encouraging when considering the flexibility being thrown by the White House in allowing China to begin to signal some back-channel willingness to speak.
Trying To See Ahead
Now with our new weekly foundational reset done, it’s appropriate to begin to transition our focus from where we are today to where we are going. To do this, we find it helpful to trust the data and conduct historical analysis before drawing emotional conclusions.
Our readers might be surprised that even with day-to-day volatility and markets seemingly all in red, MAPsignals’ trusty Big Money Index is at five-week highs:
Remember, the BMI is a 25-day moving average of “big money” professional investor activity netted. The reason it’s rising is forced selling dried up:
This signals that the washout is likely complete after huge capitulation.
In trying to see ahead, you may notice how the BMI is at direct odds with the price movement of the S&P 500 (BMI up, stocks down). How is this seemingly conflicting action possible?
When looking under the hood, it boils down to two sectors – discretionary and technology. These are typically the drivers of bull markets, but they’ve been beaten up badly.
Encouragingly, the forced selling has dried up in discretionary:
As well as tech:
If the selloffs ceased in these two important sectors, it could mean brighter days ahead.
Are we in the clear? Not exactly, at least in the short term. However, data suggests the market has reached its bottom, or is close to doing so.
To fully come out the other side, there needs to be significant buying. That would allow a market uptrend to emerge. Absent that, market gyrations will continue on lower volumes until buyers establish themselves again.
Focusing on what’s ahead, let’s turn once again to the four phases of “big money” flows:
For weeks we’ve been in phase four as sellers have dominated. But now it’s a waiting game until we hit phase one, when buyers begin to outstrip sellers. This is what will cause a spike in the equity markets.
But again, we must be patient. The required large-scale buying isn’t there yet. Rest assured, a sustainable rally will emerge when, and only when, real money is being put to work again.
Most likely this transition to phase one would begin to see support the further we are along the 90-day reciprocal tariff freeze timeline as headlines begin to subside and positive deal news is announced.
This supports our belief that stocks will most likely keep oscillating in the near term. But when looking out a few months based on historical data, the transition to market positivity seems likely to fall within that 90-day window:
This timeline is further supported with historical forward-looking returns following instances of extreme volatility:
So, over the next few weeks, we will continue to manage the downside risk as we prepare to focus on where we are going, not where we are today.
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* The CBOE Volatility Index is a measure of the short-term volatility of the S&P 500 indexes, indicating how quickly market sentiment changes and the level of investor confidence or fear in the market.
# The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
^ The Nasdaq Composite Index is a market capitalization-weighted index with over 2,500 stocks of domestic and international companies that is heavily weighted toward the technology sector.
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