Every investor knows, or should, that the moment of maximum uncertainty is a time to buy. The only trick, then, is discerning when we’ve reached peak uncertainty. The stifling lack of clarity about the breadth or severity of the Trump administration’s promised “reciprocal” tariffs due on April 2 is the obvious eye of this uncertainty storm. But swirling around it are immigration restrictions, headlong and haphazard reductions in Federal spending and a separate but related confidence shock weighing on consumer behavior. Friday’s midday rally in the S & P 500 from an early 1% decline to a minimal gain by the close came after President Trump said there would be some “flexibility” in the application of those April 2 trade measures. A vague and entirely reversible utterance, but the upward twitch in the index sends the message that after a month of volatile trading and universal fixation on policy risk, the potential for a relief trade is ample. .SPX 5D mountain S & P 500, 5 days Renaissance Macro Research has consistently pointed out that when the U.S. Economic Policy Uncertainty Index is near an extreme high (in the top 10% of all readings since 1985), forward equity performance is better than average. Over the ensuing three months, the S & P 500 has been up 80% of the time with an average gain of 8.8%. And perceived certainty is bearish: The lowest 10% of policy-uncertainty readings were followed by a positive stock market performance only 36% of the time. Currently, it hardly needs to be said, this index is at a record, eclipsing even the peak of the Covid panic. This Sunday is the fifth anniversary of that crescendo of fear in the market, marking the low of a violent V-bottom that launched stocks to a 100% gain over the next 22 months. No confidence in forecasts The suspense over the tariff details — and apprehension about how they will interact with the fragile confidence evident in recent surveys of consumers, business leaders and investors – has drained conviction from economic handicappers, including those who work at the Federal Reserve. After the meeting last week in which the Fed left interest rates unchanged and preserved a tentative outlook for a half-percentage-point worth of cuts the rest of this year, Chairman Jerome Powell said, “I don’t know anyone who has a lot of confidence in their forecast.” Here’s a visual illustration of this collective shrug of the shoulders. JPMorgan economist Michael Feroli plotted the “risk bias” of FOMC members, or which direction they believe their inflation and GDP-growth forecasts are in jeopardy of being wrong. Nearly all say the risk on core PCE inflation is to the upside, and to the downside for real GDP growth. So there is no peace on either of the two fronts that define the Fed’s mandate. Is this inherently negative for the economy and markets, though? Look at the last time those lines gapped apart to a similar degree. It was in late 2022, just as reported inflation was peaking, recession expectations were near-universal — and the S & P 500 bottomed after its nine-month, 25% bear market. Hindsight is unfailingly comforting in clarifying such market proclivities. What’s tricky right now is not simply that perceived uncertainty can always go to more extreme extremes for a while. It’s also that the market itself has not shown anything like the degree of panic or repriced fundamental expectations evident in the uncertainty gauges or experienced in early 2020 and late 2022. What we’ve had is a sharp little correction in the S & P 500 that kissed the 10%-loss threshold before bouncing a week ago Friday, having started from elevated valuations and ebullient investor expectations following consecutive 20% annual gains. When perceived uncertainty rages (yes, perceived; the world is inherently uncertain even when we’re all sure of what comes next), it is helpful to anchor to what we know about the probabilities. Recession is what matters Warren Pies, founder of 3Fourteen Research, dissected the 52 S & P 500 corrections since 1950 (which works out to around one every year and a half or so.): “Once the market falls into a correction, a ‘serious correction’ of at least 15% becomes a probability (30 out of 52 cases). However, within those 52 corrections, 28 occurred with no recession ahead in the next 12 months. Out of these cases, only 12 went on to become serious corrections.” Simplistic as it sounds, the odds of a decline something much deeper and more long-lasting hinges on whether the slowdown underway sags into an economic contraction. Of course, non-recession bear markets occur, we just had one in 2022, but we’re talking probabilities here. This is why tariffs are more than simply a psychological overhang on the market, because at some level of severity and in certain escalation scenarios they are much more potentially damaging in undercutting economic activity than in mechanically resetting some prices higher. For now, the hesitant but still healthy corporate-credit market is doing a lot of the work in holding off a recessionary setup. Weekly unemployment claims remain at benign levels. Consumer activity has slowed and retail and travel stocks have taken lumps for it, but household balance sheets aren’t badly stretched in aggregate. Industrial production was reported at a record high, something that has never immediately preceded an economic contraction. Even still, about 40% of all 10% setbacks in stocks slide at least to a 15% total decline even without a recession. And in any case, corrections and bottoms are a process not a moment. Ned Davis Research U.S. equity strategist Ed Clissold points out that after an initial rebound rally, there is typically a period of churn and retesting. “The duration of the retesting phase can be roughly proportional to the original decline,” he says. “The Feb. 19 peak in the S & P 500 to the March 13 low was 16 trading days. Another 16 days would bring us to April 4, near President Trump’s April 2 deadline for instituting reciprocal tariffs. Since tariff concerns were the main catalyst for the selloff, the April 2 deadline could bring a resolution, one way or the other.” Levels to watch I won’t argue too strenuously against the assertion that tariff concerns are the proximate headline driver of the downside chop. Yet the heaviest pressure on the market has come from not from dealers in cross-border goods but the Magnificent Seven mega-cap growth group. The “other 493” stocks in the benchmark are up slightly on the year and less than 6% below their peak. A week ago here , in suggesting the snapback rally had plenty to prove after four losing weeks, I noted that five-week losing streaks were rare and this past Friday’s triple-witching derivatives expiration looked to have a slight upside bias. Those notions held up, but barely. The S & P 500 was up half a percent on the week. It failed to hold above the 5,700 level on three separate days, finishing at 5,667, its precise mid-July high, coinciding with the peak in Mag7 dominance. It has reclaimed just a quarter of its peak-to-trough decline. .SPX 1Y mountain S & P 500, 1 year The correction low from seven trading days ago still seems a plausible, if not fully persuasive, tactical pivot point. Sentiment readings got “low enough” to allow for a market turnabout, even if investor positioning never got profoundly washed out. The S & P 500 Volatility Index put in a nice spike, peaking near 30 and then declining below 20, often a sign the fever has broken. The S & P 500 shed two P/E points in three weeks, though the freshest results and muted outlooks from Nike and FedEx prompted negative stock responses and even now that forward P/E is above 20. And it’s tough to see many catalysts for analysts to be lifting profit forecasts soon, especially given second-half estimates have held up as GDP forecasts have come down. Strategists at two Wall Street firms, Goldman Sachs and RBC Capital, have cut their year-end S & P 500 targets in recent weeks. That can sometimes be a sign that expectations are being reset in a constructive way, an acknowledgement of an intrinsically unsure future, which now seems even more unsettled thanks in part to a White House with a flair for “event programming.”
