The equity and bond markets have seen some pretty historic moves over the last week or so. In fact, the S&P 500 has moved more than three standard deviations away from its long-term trend. That’s only happened two times in the last seven years. The last two times were in December 2018 when the credit markets froze, and the COVID-19 decline.
In both of the last two instances when the equity market has seen these kinds of rare moves, it hasn’t stayed outside the long-term range very long. In 2018 it regained its footing in just two days, and during the COVID-19 event was about a week before it managed to stage a bit of a bounce. But, in spite of the initial rebound, it was still a few weeks in each of the previous cases before the market was able to really sustain a solid upward trend again.
So, based on these small samples from the last decade, the current market movement has put it in a pretty rare situation. In some sense, the moves by the President to disturb global trade by implementing punitive tariffs is kind of like the impact the COVID event had on supply chains globally. This recent event will also likely negatively impact corporate profits, and the equity market has to try and figure out how to adequately price those disruptions into current price levels.
We could possibly see an oversold bounce as the market has moved so sharply so quickly, but in my opinion, we’ll need to see certain events take place before we could see a sustainable change in trend: (1) either the Fed will take steps to provide stability to the system, or (2) The administration announces new trade agreements have been reached with some of the major trading partners.
Unfortunately, as of today, neither of those events looks likely to happen right away.
Last week, Fed chair Powell made some comments that didn’t indicate the Federal Reserve has any desire to step in with either Quantitative Easing (QE) or lowering interest rates. In fact, he made comments that trade issues are not under the Fed’s mandate and that the tariffs are likely to raise prices and slow growth. Two factors. that if they came about, would make it very difficult for the Fed to take any action.
On the administration front, several senior advisors were on the Sunday talk shows saying the tariffs are not a negotiation ploy and they see them staying in place. Both Vietnam and Taiwan have indicated they are willing to abandon their tariffs on US goods, but Europe and China seem to be digging in their heels and steeling for a long fight.
Bottom line: until there are some signs of movement by either the Fed or the administration, it's unlikely we’ll get enough clarity for the market to regain a sustainable uptrend. However, that doesn’t mean every day will likely see such sharp downside movements. At some point, the valuations will attract some buying interest.
In times like these, it's important to maintain your long-term focus and understand though we won’t escape seeing some effect from the market volatility, having a diversified portfolio helps cushion the overall impact. When the time is right, we will be looking for good opportunities.
