*Editor’s Note: over this past weekend, post writing this blog post, it was announced that the trade delegation meeting between the U.S. and China in Switzerland led to positive dialogue that included a 90 day pause of reciprocal tariffs from both nations to allow for further negotiations that would target a permanent trade agreement.
It might not feel like it, but the S&P 500* has recovered over 50% of its losses since falling 20%. It’s hovering close to the 200-day moving average 5,747.
This pattern is similar to 2022, when the index fell about 20% only to recover to the 200-day moving average on the eve of the Federal Reserve’s Jackson Hole conference. This is important because in 2022 Fed Chair Jerome Powell gave a very hawkish speech around the need for more rate hikes.
Then stocks spiraled down 20% again into the October 2022 lows:
Similarly, last week investors were wary of the May Fed meeting creating a similar reaction based on Chair Powell's commentary. We at Cornerstone understand this narrative would seem familiar considering the high level of investor skepticism. In our view, we think this isn’t an accurate comparative environment though because the risk/reward outlook is better than in 2022.
Anecdotally, we think this thesis was somewhat confirmed last week as Chair Powell's comments were expectedly interpreted hawkishly as he stated the Fed cannot respond to tariffs until impacts on both inflation and employment are clearer. But this time, the market barely reacted.
This risk/reward optimism was further supported last week as the White House announced the first trade deal and the S&P 500 rose the following morning to around 5,658. That’s almost a full recovery to where the market stood on April 2:
Furthermore, Chairman Powell’s comments appear to have already been priced in. Since the recent April jobs report, the number of expected rate cuts in 2025 has fallen and the market hardly blinked:
What’s more, overall sentiment remains visibly bearish. The latest American Association of Individual Investors (AAII) data shows the latest reading of bears at 59.3%:
Bears have been the majority since February. So, it makes sense that recent Fed commentary didn’t move the needle much. The news was priced in because bears likely already sold and there weren’t many bears left to sell.
Conversely, it makes sense that part of the positive developments (i.e., the reward for the risk) are now beginning to have a great effect on market movement. For example, there was a positive market reception to the announcement that Treasury Secretary Scott Bessent would meet with his Chinese counterpart in Switzerland this past weekend:
This didn’t seem possible a week ago.
We think trade tension de-escalations are the absolute most important development in the near term. First quarter earnings have reflected resilient U.S. companies producing solid results in the face of tough economic conditions. More certainty around trade keeps that performance intact and lessens the risk of spiraling into an economic contraction.
How do we know we haven’t already reached the breaking point? High yield market spreads yield clues.
High yield spreads sit at about 360 basis points. For perspective, this year spreads went from 259 basis points in January to 459 basis points last month:
Recovering more than 50% of the widening is a significantly positive sign. Historically, if the economy was barreling towards a recession, we’d expect these spreads to have already widened to 600 basis points or more. These developments on the reward side are supportive and are the driving factors for why equity markets have staged a rally since April 7, nearing the 200-day moving average.
This market retracement is a result of significant breadth, not a few technology companies:
That shows real support and not a “dead cat bounce” environment. While it's been quite a roller coaster comparatively, we can be thankful this instance of whiplash has been short.
We think the situation is changing to where the rewards are starting to outweigh the risks significantly. That said, there's no sugar coating that bear markets, even short ones, can be brutal:
Even better, bull markets dwarf bear markets in time and performance. Bull markets average 133% gains over almost four years.
Emotionally, it’s crucial to remember that once entering a bear market, investors have only been down in one instance three years later:
This is why we’re so steadfast in our philosophical approach. It pays not to react.
Circling back to credit markets, it’s imperative to understand that historically credit markets crack before equities. But that hasn't been the case this time.
If you compare equity stress to credit stress, you might find it interesting that in this latest instance, there was a significantly bigger panic in equities relative to credit. Historically, this kind of imbalance doesn't happen during long-term, durable recessions.
Every time markets have seen extreme equity panic relative to the credit market reaction, the S&P 500 has been higher a year later. This data point is one of the most important data points for long-term investors currently:
Finally, in another effort to highlight reward starting to outweigh risk, let’s return to market breadth. Since April 2, the market lift has been done with minimal support from the “Magnificent 7” companies we’ve all heard about many times.
The “Mag 7” fell 33% in total versus a 21% decline for the S&P 500. This doesn’t make sense fundamentally because these firms’ balance sheets can withstand economic weakness more than other companies.
Also, during this earnings season, the “Mag 7’s” 12-month forward earnings expectations have been revised higher by 14.7% compared to the rest of the S&P 500 at 5%, and forward-looking earnings expectations are substantially higher:
Combining per-share earnings jumps and market price declines, we’ve seen mega-cap tech valuations come way down:
So, the market stabilized and recovered without the biggest, baddest companies joining in.
If you listen to the news, you’d think risk still outweighs reward. But the data says otherwise.
Plus, there's always a reason to sell. We so quickly forget that this pattern repeats itself almost annually. Since 1928, the S&P 500 has gained 29,645%, with many reasons to sell throughout that time.
Even since 2008 a lot has transpired:
But if you want to succeed as a long-term investor, you have to tune out the noise. Follow the data, identify fundamentally stellar stocks, and hold onto them.
* Links to third-party websites are being provided for informational purposes only. CoreCap is not affiliated with and does not endorse, authorize, or sponsor any of the listed websites or their respective sponsors. CoreCap is not responsible for the content of any third-party website or the collection or use of information regarding any websites users and/or members.
*Past performance does not guarantee future results.
*Investing involves risk and you may incur a profit or loss regardless of strategy selected.
* The S&P 500 is an unmanaged index of 500 widely held stocks that is generally considered representative of the U.S. stock market.
Securities sold through CoreCap Investments, LLC. Advisory services offered by CoreCap Advisors, LLC. Cornerstone Financial and CoreCap are separate and unaffiliated entities.