The world has changed significantly ever since President Trump implemented his tariffs to handicap the US’s trading partners.
But by the time you’ve read this column, things may have changed again, given how fluid the situation is!
Whilst volatility has spiked dramatically, making things very interesting yet challenging from a trading perspective, let’s back-track a touch and consider what happened over the first quarter of this year.
It was certainly a quarter of two halves.
As far as the S&P 500 and NASDAQ were concerned, the world’s most important stock indices, the first six weeks saw a continuation of the bull run that began back in October 2022 (or even post-1929 for those on longer timeframes).
Following a modest pullback from mid-December into January, both the S&P and NASDAQ recovered their respective mojos and pushed up to fresh all-time highs in February.
From there, US equities retreated, led by the tech giants that had been at the vanguard of the rally from the 2022 lows.
The sell-off saw the S&P and NASDAQ shed 10.7% and 15.5%, respectively, by the end of the first quarter, taking both indices into correction territory (defined as a decline of 10% from the most recent high).
Yet, thanks to a strong start to the year, the overall losses for the quarter itself were a more modest 4.7% for the S&P and 10.4% for the NASDAQ.
This could be viewed as a healthy move. It certainly took some of the fluff off big tech, helping to bring down dangerously overvalued corporations to seriously overvalued levels.
The fact that the S&P’s losses were less than half of those for the tech-heavy NASDAQ indicated that money hadn’t left equity markets completely.
Instead, investors sought out previously neglected sectors.
Money flowed out of tech, telecoms, and consumer discretionary and headed into financials, healthcare, energy, materials, and consumer staples.
For those of us wondering when investors were going to pile in and ‘buy-the-dip’, a strategy which had been an absolute winner over the past couple of years, maybe that rotation was part of the answer.
So while certain sectors have done ok, the last six weeks continue to be pretty grim for tech stocks and the ‘Magnificent Seven’.
And given that the ‘Mag 7’ still accounts for 30% of the S&P 500 by market capitalisation, then it’s no wonder that these major indices have also failed to recover.
Where now? President Trump’s tariff announcement may have provided much-needed clarity for the markets, providing a green light for dip buyers to pile back in.
Alternatively, it could be that his latest round of tariffs are so severe that investors have dumped stocks, plunging equities into a full-blown bear market.
If the latter, then there will come a time when equities are so oversold that the bravest dip buyers emerge and send them back up again. But the former path is also treacherous.
Markets respond to collective sentiment.
Many may feel that President Trump may be too cavalier in his approach to trade, which is, after all, something that builds up over years of complex negotiations and relationships.
Mr. Trump was widely viewed as a man who understood business and who promised to deregulate and cut taxes to free up commerce.
Instead, he’s making life harder, as US automakers (who the president believes are set to profit from tariffs) have attested. It is a sad fact that what takes a lifetime to create can be destroyed in minutes.
(David Morrison is a Senior Market Analyst at Trade Nation. Views are his own.)
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