Was “Liberation Day” a
Death Sentence for the Markets?
By the Curmudgeon with Victor
Sperandeo
Trump’s
Tariff Terror Crashes the Markets:
The
global, all-asset rout last Thursday and Friday was singularly due to President
Donald Trump’s unexpectedly strong and far-reaching tariff announcement on
Wednesday afternoon after the market closed.
As expected, China retaliated on Friday in a very big way.
Beijing
will now impose an additional 34% levy on all imported U.S. goods, put controls
on more than two dozen U.S. companies, curbed access to rare earth minerals and
launched a probe into U.S. chemicals giant DuPont. It was the first time China
imposed tariffs on all U.S. goods with no exceptions.
While
we highlighted elevated risks in our last post- Charts show Stock
Market Over-Valuation and Divergences, we did not expect the waterfall declines that
occurred on Thursday and Friday - not only in U.S. and international stocks,
but in every other asset class except U.S. Treasuries (notes, bonds, and ETFs/
mutual funds).
The
Dow Jones Industrial Average (DJI) plunged 2,200 points while the S&P
500 fell nearly 6% on Friday to close Wall Street’s worst week since the
2020 COVID panic. The carnage in the S&P 500 was widespread, with only 14
stocks rising, 486 falling, and 28 dropping 10% or more. The market wide toll
from the two-day tariff rout was a record $6.6
trillion. The Magnificent Seven group of large tech stocks erased $1.5 trillion in market value on Thursday and Friday,
according to Dow Jones Market Data.
Friday’s
declines were broad-based among asset classes. Gold futures slid 2.7% to $3,012
per troy ounce after climbing to record levels earlier in the week. Mining
shares and ETFs were down by over 10%. Benchmark U.S. crude oil prices fell
nearly 14% over two trading days to $61.99 a barrel, their lowest level since
April 2021.
PIMCO’s
“best ideas” global multi-sector bond fund (PIMCO Dynamic Income or PDI),
owned by the Curmudgeon for many years, was down 10% on Friday.
The
CBOE Volatility Index (VIX) surged to 45.31 on Friday, its highest
closing level since April 2020, according to Dow Jones Market Data.
No
Warning Signs!
The
outlines of Trump’s “Liberation Day” tariff policy were not telegraphed or even
hinted at in advance. So, it was a
massive surprise to economists and an ultra-huge shock for the markets.
The
U.S. stock market showed tremendous resiliency as it rallied Monday, Tuesday,
and Wednesday, expecting much milder and fewer tariffs to be announced by
Trump. On Wednesday, the U.S. market
averages were up 0.7% to 0.9% at the close of trading. Canada's main stock
index, the S&P/TSX Composite, added 273.90 points, or 1.09%.
-->The
Curmudgeon was prepared to sell most of his stocks and ETFs, but was encouraged
by the markets refusing to decline, so did nothing.
"We
believe peak tariff uncertainty may soon be behind us,” said Kurt Reiman,
UBS Global Wealth Management on Wednesday. "Much of the work the
administration set out to achieve will have been put in place, and there are
numerous potential off ramps available." Really?
As
of Wednesday’s close, Richard Russell’s Primary Trend Index (PTI) was BULLISH
as it climbed above its 89-day moving average by 4 points. Note: The PTI is now maintained by the
Aden Sisters, and we recommend their Aden
Forecast monthly market letter and mid-week update. It covers all the
major markets.
Norman
Fosback’s Seasonality Timing System, championed by Mark Hulbert in a March
24, 2025 Market Watch article, was 100% invested in stocks/equity mutual
funds on April 3rd and 4th. It buys at the close on the next to last
trading day of each month (March 28th) and sells at the close on the
fourth trading day of the next month (April 4th).
Top
market timers like Dan Sullivan’s Chartist were 100% long U.S. stocks
and ETFs through Friday’s close.
As
of April 1st, Bob Brinker’s Market Timer Model Portfolio I and II
were 80% and 85% long equity mutual funds, respectively. Market Timer
Model Portfolio III (Balanced) was 95% invested in equity and fixed income
mutual funds.
Recap
of U.S. Stock Market Index Declines:
S&P
500 This Year:
Source: LSEG Data & Analytics via The New York Times
The
S&P 500 has declined 17.4% from its
all-time closing high of 6144.15 on February 19th to a closing level of 5074.08
on Friday.
The
tech heavy Nasdaq Composite index has fallen
22.7% from its December 16th closing high.
The
small cap Russell 2000 decline was even worse, with a loss of ~ 25%
since its November 2024 peak.
….……………………………………………………………………………………………………
Key
points to consider:
l After rising for the first month after President
Trump's inauguration on January 20, 2025, U.S. stocks have reacted very badly
during the next few weeks.
l After other poor reactions in the S&P 500 during
the 50 days following inaugurations, stocks continued to struggle.
l This contrasts strongly with times when investors
were eager to buy, as those showed a strong tendency to persist.
Source:
SentimenTrader Lite Newsletter
….……………………………………………………………………………………………………
Victor’s
Comments:
Disclaimer: I am working on a large derivative trade with a
major bank for $500 million of institutional money and
so I have not focused on trading. One
could write a book on the events that occurred in the last month, so it’s best
to keep to the essentials in this post.
I
use Dow Theory and a 200 day Moving Average indicator for long term
stock market projections. I can honestly say I have made a living from Dow
Theory as observed and followed by Robert Rhea who wrote a market letter “Dow
Theory Comments “from 1930 to 1939 every 10 days. I bought a copy of his
letters in 1970 (over 600 pages) and tracked his predictions on the long and
intermediate term trades… he was perfect!
Rhea certainly understood the theory and made it into a science.
The
Dow Theory gave a bear market signal on March 10, 2025. I sold all my
stocks, gold and silver shortly thereafter. Although I still own spot gold and
silver and cash. The chart below shows the Dow Theory significant out
performance and drawdown reduction compared to a buy and hold strategy.
The
other long term stock market indicator I follow is the
200-day moving average (MA). It is described in the book, “The Stock
Market Indicators,” by William Gordon published in 1968. Gordon has done more work than any individual
on indicators and especially moving averages.
An
investor/trader gets short or flat stocks when the price of the index followed
is below its 200-trading day MA, but ONLY when the MA is SLOPING
DOWNWARDS. Conversely, one goes long
stocks when the price is above the MA which is sloping upwards.
The
highest return Gordon showed on the 10 indicators in his book was using the
MA. It was +18.5% compounded. His calls using the Dow Theory showed +18%
from 1900 to 1968.
Fast
forward to today: the 200-day MA for the S&P 500 turned down on April 1st.
If you followed this, you would’ve been out of the market in T-bills (or the
equivalent money market funds).
The
markets are trading on tariffs. The market misunderstood Trump’s view of what
that means. He based the tariffs on
country-by-country deficits, not specific reciprocity, as he previously
said.
No
one needs to say that Trump has any guidelines or philosophy to his actions. He
reacts to emotions and his gut feelings. I would add this to any politician in
general, but Trump is in a class unknown to any world leader. He changes his
mind in minutes. It’s impossible to anticipate his actions.
Curmudgeon
add-on: Investors and companies can
adjust to most things when they know the rules but under Trump, the rules keep
changing. For example, the so called
“reciprocal” tariffs were not calculated on the tariffs or non-tariff barriers
other countries imposed on the U.S., as Trump previously said. They’re just
based on deficits!
That
assumes that deficits can only result from unfair trade practices, which is
totally false. Also, the 10% minimum tariff on all countries, regardless of
tariffs or deficits, is by definition not reciprocal.
….…………………………………………………………………………………………
The
current tariffs, if not reduced, will lead to a global recession or worse.
Tariffs are a tax and when you tax producers or other countries history clearly
shows they retaliate most of the time. This develops into global trade wars
where no one wins.
In
summary, I am bullish on 5-year T-Notes and bearish on stocks. As a guide (not
a target), the bear market in the S&P 500 has an intermediate median
decline to 4,600. That’s only 474 points
down from Friday’s close of 5,074 or a <1% decline.
End
Quote:
Adam
Smith (1723-1790) grudgingly admits that
retaliation in a trade war may have some good effect if it leads to the
abandonment of the initial protective duty, but he is highly doubtful that the
“insidious and crafty animal, vulgarly called a statesman or politician” can or
really wants to end protection in this manner. All it does is benefit a few at
the expense of the many.
….……………………………………………………………………………………………………
While
it’s easier said than done, try to stay calm and be well. Success, good luck,
and till next time…………………………………
The Curmudgeon
ajwdct@gmail.com
Follow the Curmudgeon on Twitter @ajwdct247
Curmudgeon is a retired investment professional. He has been involved in financial markets since 1968 (yes, he cut his teeth on the 1968-1974 bear market), became an SEC Registered Investment Advisor in 1995, and received the Chartered Financial Analyst designation from AIMR (now CFA Institute) in 1996. He managed hedged equity and alternative (non-correlated) investment accounts for clients from 1992-2005.
Victor Sperandeo is a historian, economist and financial innovator who has re-invented himself and the companies he's owned (since 1971) to profit in the ever changing and arcane world of markets, economies, and government policies. Victor started his Wall Street career in 1966 and began trading for a living in 1968. As President and CEO of Alpha Financial Technologies LLC, Sperandeo oversees the firm's research and development platform, which is used to create innovative solutions for different futures markets, risk parameters and other factors.
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