​The Markets
 
How’s everybody feeling?
 
If you said, “Not great,” you’re not alone. There is an abundance of negative sentiment today. Many people – from consumers to small business owners, and from asset managers to investors – are feeling less optimistic. Here’s the data.
 

• The University of Michigan’s Consumer Sentiment Survey’s final data for April showed that sentiment tumbled for the fourth month in a row. “While this month’s deterioration was particularly strong for middle-income families, expectations worsened for vast swaths of the population across age, education, income, and political affiliation…Labor market expectations remained bleak. Even more concerning for the path of the economy, consumers anticipated weaker income growth for themselves in the year ahead. Without reliably strong incomes, spending is unlikely to remain strong amid the numerous warning signs perceived by consumers,” wrote Surveys of Consumers Director Joanne Hsu.

 

• The National Federation of Independent Business (NFIB) Small Business Optimism Index fell from February to March, settling just below its long-term average. “The implementation of new policy priorities has heightened the level of uncertainty among small business owners over the past few months. Small business owners have scaled back expectations on sales growth as they better understand how these rearrangements might impact them,” stated NFIB Chief Economist Bill Dunkelberg.

 

• The Bank of America Global Fund Manager Survey showed that, in April, asset managers were the most bearish they’ve been in three decades with sentiment around economic growth particularly low. “Fund managers are extremely gloomy, with 82 [percent] of respondents…expecting the global economy to weaken,” reported Michael Msika of Bloomberg.

 

• The American Association of Individual Investors (AAII) Sentiment Survey found that 55.6 percent of investors were feeling bearish about how the stock market will perform over the next six months. That is well above the historic average of 31 percent bearish.

 
It’s fair to say that sentiment has been at extremely low levels. A contrarian would point out that this could be a positive development. When everyone is bearish, contrarians are bullish. They tend to look for opportunities to augment portfolio holdings with attractively priced investments that may help achieve long-term goals.
 
If you don’t share a contrarian outlook, stay focused on the importance of remaining invested as stock and bond markets move higher and lower. “All of this chaos underlined something that is historically true for the stock market – the sharpest percentage drops and largest percentage gains are often not far apart. For that reason, walking away from the market after a big drop could mean missing out on the market’s best days,” reported Gordon Gottsegen of MarketWatch.
 
 
For example, major U.S. stock indexes fell by more than two percent last Monday but, by the end of the week, the indexes had recovered those losses and moved higher. There were two drivers behind last week’s gains. The first was hope for a resolution in the U.S.-China trade war and the second was renewed confidence that Federal Reserve Chair Jerome Powell will remain in his position, reported Connor Smith of Barron’s. Yields on longer maturities of U.S. Treasuries moved lower over the week.

​The Markets
 
As the market turns...
 
When investor preferences shift and money flows from one sector, industry, investment style or geographic region into another, it is called a market rotation.
 
For years, stock markets in the United States have outperformed stock markets elsewhere. “The outperformance is attributed to U.S. exceptionalism fueled by a strong culture of innovation and entrepreneurship; more flexible labor markets; higher productivity; stronger consumer consumption driving demand for goods and services; a more favorable regulatory environment; lower corporate taxes; stronger intellectual property rights; and more open markets and trade policy,” reported Larry Swedroe of Morningstar.
 
One consequence of U.S. outperformance is that investors outside of the United States own a lot of U.S. stocks, about $18.4 trillion, reported Tracy Alloway and Joe Weisenthal of Bloomberg. The percent of European investors’ total equity portfolios invested in U.S. stocks has more than tripled since 2011, in part due to strong performance.
 
Now, Europe’s financial markets are outperforming those in the United States.
 
“Across assets of all stripes, the Old Continent is collectively trouncing America in a way that’s rarely been seen before…German bonds last week beat Treasuries by the most ever. And while European shares have been knocked by the trade war, they’re turning out to be far more resilient than American ones,” reported Alice Gledhill, Abhinav Ramnarayan, and Julien Ponthus of Bloomberg last week.
 
Over the last two months, global investors have backed away from United States markets. Bank of America’s monthly global fund manager survey found that asset managers have reduced U.S. allocations by more than half since February. “A majority think a trade war that triggers global recession is the biggest risk for markets,” reported Reuters.
 
The recent geographic market rotation was a reminder of the importance of diversification. While diversification won’t prevent losses, it can help investors effectively manage risk. Investors who held a geographical diversified portfolio may have fared better this year than those who invested only in the United States.
 
Last week, which was shortened by a holiday, major U.S. stock indices moved lower, reported Teresa Rivas of Barron’s. Yields on U.S. Treasuries were mixed over the week.

Guidance Wealth will be closed Friday, April 18th to observe the Good Friday holiday

The Markets
 
All eyes on the bond market.
 
The scale of the tariffs introduced by the administration shocked investors, sparking a roller coaster of a week for stock markets. Last week, U.S. stocks:
 

• Rallied on a rumor.
• Fell when the rumor was recognized as a rumor.
• Rose when President Trump paused reciprocal tariffs on most countries for 90-days.
• Fell as investors considered how the remaining baseline tariffs (10 percent on all countries, steel and aluminum tariffs, and 100%+ tariffs on China) might affect companies and economies.
• Rallied after the Federal Reserve assured investors it was prepared to step in, if needed.

 
“Economic angst enveloped every corner of Wall Street as U.S.-China trade tensions escalated, sparking a slide in stocks, the dollar and oil, with liquidations in U.S. assets pointing to disorder in the financial system,” reported Rita Nazareth, Isabelle Lee, Denitsa Tsekova, and Vildana Hajric of Bloomberg.”
 
Disorder in the financial system
 
Some of the disorder was found in the United States Treasury market where yields were moving higher when many expected them to move lower. Investors who are concerned about risk and sell stocks tend to seek financial shelter in investments that are perceived to be steady in a storm. For many years, United States Treasuries have been a “safe haven”.
 
So, last week, there was an expectation that, as investors sought shelter from the tariff storm, rising demand would push Treasury yields lower. That wasn’t the case. Investors sold U.S. Treasuries, pushing yields higher, reported Sydney Maki and Carter Johnson of Bloomberg.
 
“Billed as so rock-solid safe they’re risk-free, US Treasury bonds have long been the first port of call for investors during times of panic. They rallied during the global financial crisis, on 9/11 and even when America’s own credit rating was cut…But this time may be different. As President Donald Trump unleashes an all-out assault on global trade, their status as the world’s safe haven is increasingly coming into question…Yields, especially on longer-term debt, have surged in recent days while the dollar has plunged,” reported David Rovella of Bloomberg.
 
The Federal Reserve (Fed) soothed the market
 
On Friday, Minneapolis Fed President Neel Kashkari and Boston Fed President Susan Collins both discussed ways the Fed can “manage a dislocation, or pricing disruption, in the Treasury market…[the moves] are instruments designed to keep markets running smoothly by making sure there is enough liquidity, meaning financial institutions have access to the short-term funding they need to operate,” reported Nicole Goodkind of Barron’s.
 
Markets were soothed by the assurance that the Fed stands ready to “keep financial markets functioning should the need arise,” reported Stephen Culp of Reuters. By the end of trading on Friday, major U.S. stock indices were in positive territory. Yields on longer maturities of U.S. Treasuries also finished the week higher.

The Markets
 
“If you can keep your head when all about you are losing theirs…”
 
The advice offered by Rudyard Kipling’s poem “If—” resonated last week. A sharp escalation in trade tensions sparked a stock market downturn despite news that the United States economy created far more jobs in March than economists had expected, reported Lucia Mutikani of Reuters.
 
Late Wednesday, President Trump announced tariffs on countries around the world. The tariffs were significantly larger than anticipated, and stock markets immediately moved lower. Over two days, the Standard & Poor’s (S&P) 500 Index lost about $5 trillion in market capitalization, reported Lynn Thomasson of Bloomberg.
 
It was the “largest decline for stocks listed on major U.S. exchanges since March 16, 2020, when $3.5 trillion in value was wiped out, according to Dow Jones Market Data,” reported Connor Smith of Barron’s. (March 2020 was when the COVID-19 outbreak officially became a pandemic.)
 
In contrast, government bonds rallied as yields fell. Investors preference for lower risk assets “resulted in rising demand for government debt in the U.S., U.K., Germany, Japan and Australia — which sent yields down across all those countries,” reported Vivien Lou Chen of MarketWatch.
 
Three reasons for the stock market downturn
 
While tariffs were the catalyst for the market downturn, they weren’t the only reason for the decline. Other contributing factors included:
 
1.  A tsunami of uncertainty. You’ve heard it before: Markets hate uncertainty. The new administration’s tariffs brought a tsunami of uncertainty. Some investors opted for safe havens as they awaited greater clarity around key questions, including: 

• Are the tariffs a negotiating tool or a permanent tax?
• How will tariffs effect the outlook for economic growth?
• How will tariffs effect corporate profitability?
• How will other countries respond?

 
“The scope, speed and magnitude of the Trump administration’s tariff blitz left investors with a lot of questions. But one point came through crystal clear: The post–World War II global world economic order is no longer. That is forcing a reassessment by countries on how to respond and pushing investors to reassess long-held assumptions about profit margins, investments, and inflation, reported Reshma Kapadia of Barron’s.”
 
2.  High market valuations. Over the past two-plus years, excitement about artificial intelligence, an economic soft landing, pro-business policies, and other factors have helped lift stock prices to extraordinary levels. By many measures, U.S. stocks were expensive, which made them vulnerable to decline, reported Jacob Sonenshine of Barron’s. The imposition of extraordinary tariffs forced investors to reassess expectations for U.S. economic growth, corporate earnings, inflation, and share prices. 

“Over the medium to longer term, Trump’s tariff and trade policy will likely accelerate the move to diversify supply chains, emphasize regionalization over globalization, and invest in becoming more self-reliant… But given the uncertainty and increasing costs of inputs, companies may rethink where they allocate long-term capital,” wrote Kapadia.
 
3.  The tariff narrative. Narrative economics is a theory developed by Nobel-prize winning economist Robert Shiller. Its premise is that viral stories influence economic behavior. As a result, viral narratives can influence markets. Shiller explained, “…whether it’s the belief that tech stocks can only go up, that housing prices never fall, or that some firms are too big to fail. Whether true or false, stories like these—transmitted by word of mouth, by the news media, and increasingly by social media—drive the economy by driving our decisions about how and where to invest, how much to spend and save, and more.” 
​
Last week, a dominant narrative was that tariffs may cause a trade war, which could have unfavorable and long-lasting effects on the U.S. economy. “While trade wars don’t involve armies and bloodshed, some of the same rules apply—especially when it’s a war of choice. Strengths need to be assessed, allies cajoled, goals set, and preparations made. When done right, victory can be reached with relative ease and result in an increase in standing. When poorly planned, strengths turn into weakness, quick victories become battles of attrition, and unintended consequences can last for years,” reported Ben Levisohn of Barron’s.
 
By the end of the week, the technology-heavy Nasdaq Composite Index was in bear market territory, down more than 20 percent from its previous high. The Dow Jones Industrial Average had moved into correction territory, and the S&P 500 Index had experienced its worst week since 2020, reported Amalya Dubrovsky, Karen Friar, and Ines Ferré of Yahoo! Finance. Yields on longer maturities of U.S. Treasuries moved lower, pushing the value of previously issued Treasuries higher.
 
Stock market volatility is likely to continue as the tariff story plays out. While the tariff story plays out, it’s a good idea to stay calm and focus on your plan. Your portfolio allocation and diversification strategies were put in place to help you achieve your financial goals. Taking drastic action in response to a short-term market upheaval could affect your ability to reach those goals. If you have questions or would like to discuss recent events, please get in touch.