Markets Rally on Reduced Trade Tensions
Stocks had a strong showing last week, helped along by easing trade tensions and some encouraging words from Washington. Signs that the U.S. and China could be moving toward a “trade truce” gave investor sentiment a boost, along with reports of progress on new trade deals with Korea, India, and Japan. President Trump also appeared to back off his recent criticism of Fed Chair Jerome Powell and announced he has no intention of attempting to oust the current Fed Chair, helping calm worries about political pressure on the central bank.
According to FactSet, 73% of companies beat expectations, making for a pretty good week across the board. The Nasdaq led the charge higher, and small- and mid-cap stocks logged their third straight week of gains. The major indexes have now put some real distance between themselves, and their recent correction lows the past couple of weeks. Since then, the Dow was up over 9%, the S&P 500 was up better than 14%, the Nasdaq has had an impressive 17+% return.
Gold took a breather last week after investors cashed in some profits, and oil slipped on talk that OPEC+ might pump more. Copper was a bright spot, rallying thanks to lower supply from China. The U.S. dollar started the week soft but bounced back and ended a bit higher as tensions around trade and the Fed cooled off while bond yields dropped, with the 10-year falling below 4.3% for the first time in a couple of weeks.
Source: stockcharts.com
Is the worst behind us?
Markets staged a relief rally last week as the US administration softened its trade stance and concerns about Fed independence eased. With the U.S. appearing to seek ways to roll back tariffs, it’s possible that the worst of the trade-driven uncertainty is now behind us. Still, after this initial bounce from extreme pessimism, further gains will likely depend on real progress, such as finalized trade agreements with major partners, rather than just more hopeful headlines.
Earnings season is also underway with over 1,000 companies set to report this week. So far, things have been going better than expected on the earnings front and guidance has not been as bad as feared given the tariff situation. The more upbeat reports we receive, the better off we will likely be, and, historically, earnings tend to surprise to the upside .
The Week Ahead:
One of the biggest questions for investors right now is: “How much damage have tariffs actually done to the economy?” and this week’s economic data that will help answer that question. Friday’s jobs report is the main event, and it’ll show whether the strong labor market is still holding up. Other reports on job openings, private payrolls, and unemployment claims will also help paint a clearer picture. If the job market stays solid, that’s good news for the economy and stocks. We’ll also get a key manufacturing report (the ISM PMI) on Thursday and will want to see strength here as well to show that tariffs are not hurting businesses more than expected. Bottom line, the stronger the data this week, the better it should be towards improving investor sentiment…
Tying it all together:
Uncertainty has been driving the markets lately as investors seemingly fear the new administration’s tariff policies and potential trade wars could induce a recession, despite the fact that hard economic data remains largely firm. The S&P 500 technically entered “Bear Market” territory, having slid over -20% from its recent highs before rebounding, and the new intermediate trend direction needs to be respected.
So far, defensive sectors, value stocks, and low-volatility names have held up relatively well. At the same time, maintaining diversification and strategically overweighting safe havens like bonds and precious metals has provided added comfort to stay the course. We are certainly not out of the woods just yet, but a glimmer of hope has emerged as some of the economically sensitive assets like commodities have begun to trade up, the dollar has weakened a good bit which may provide a tailwind to corporate profits, and tariff negotiations are underway. Markets are functioning properly with plenty of liquidity and the bond market, aka Smart Money, appears to have calmed down for now.
How this will all play out is yet to be seen, but please keep in mind that market downturns, such as the current one, have historically presented opportunities for long-term investors. These periods may allow for acquiring assets at more favorable valuations and securing stronger portfolio yields. It’s important to maintain a long-term perspective while exercising patience, vigilance, and diversification. Historically, these market conditions have tended to be short-lived, often rewarding those who remain focused on their long-term investment goals.
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