Equities Swoon as Tariffs Loom
Equities continue to slump with the S&P 500 registering a 10% peak-to-trough decline in just 14 days. Technology, transportation, and momentum factors are the weakest with drawdowns around 14-15%. Health care, consumer staples and real estate have fared the best with drawdowns of 2-3%. Foreign developed continues to outpace the U.S. and the gap is becoming sizeable with gains of 9% compared to declines of 8.5% in the NASDAQ.
Europe appears to have made a sea-change regarding defense spending. Germany agreed to major fiscal expansion as the current U.S. administration demands Europe pay more. This should be a tailwind to growth and earnings in the region. Also, the European Central Bank (ECB) cut rates last week and is likely to remain supportive of larger fiscal expenditures given a decade of weak growth and the consensus view that this is a priority to national security.
Tariffs continue to take center stage, but statements from the White House alluding to tougher times ahead are likely contributing to weakness over the last five days. It started last week with the Treasury Secretary and was never walked back by the White House. In fact, President Trump emphasized it over the weekend.
- Treasury Secretary Scott Bessent called for a “detox” period last week.
- White House statements on prioritizing private business activity imply no course change.
- President Trump said the U.S. was in a “transition” period over the weekend.
- Jerome Powell commented on Friday the Federal Reserve should be patient before cutting.
The higher quality NASDAQ 100 has given an ominous sign this week. The price dropped below the 200-day moving average for the first time in a year and then proceeded to drawdown an additional 3.5% within two weeks. The only other occurrences were in 2000, 2008 and 2022 before bear markets. Most of the time the 200-day was hit, price found support over the ensuing two weeks and 1-year returns were very strong. In this case, the additional drawdown is already 5% and suggests caution is warranted. There are other confirming indicators that suggest caution based on the speed of the decline, which has been shown to be a factor in estimating the final peak-to-trough drawdown.
Economic data may be in a transition period as reported numbers are holding up well, but the Atlanta Fed GDPNow has gone from +3.8% to -2.4% in six weeks. Job cuts this month were 172,000, more than three times the three-year median and the highest since 2020. Next week brings retail sales, which is coming off its worst month in nearly two years and the Federal Reserve meeting.
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Sources: BTC Capital Management, Bloomberg
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