In just two trading sessions, the S&P 500 lost 10% as the stock market shed $6.6 trillion in market value. It was the largest two-day loss in history.
While the stock market has been pulling back since the peak on February 19, the downside accelerated quickly after President Trump announced a massive round of new tariffs.
In addition to a a new 10% tariff on all imports into the U.S., other countries also face much higher extra rates. For instance, the tariff rate on imports coming from China could top over 60% following the latest round of increases.
As a result of the scope and scale of new tariffs, the weighted average tariff rate will significantly surpass the rate seen after the Smoot-Hawley Act that helped drive the Great Depression (chart below)
Even before the latest trade war escalation, there were signs that tariff policies were impacting business spending and consumer sentiment surveys. Last week, the the new orders component of the ISM manufacturing report declined sharply to 45.2 from 48.6 the prior month. New orders are a leading indicator of economic activity, where a reading below 50 in the ISM report indicates contracting activity.
And if investors are hoping for help from the Federal Reserve, they might be waiting awhile. During speech on Friday, Fed Chair Jerome Powell reiterated the central bank’s “wait and see” approach.
Powell also stated that the central bank’s “obligation is to keep longer-term inflation expectations well anchored and to make certain that a one-time increase in the price level does not become an ongoing inflation problem.”
That shows the inflationary implications and concerns from more tariffs. At the same time, lagging indicators of labor market activity is not sparking any warning. The March payrolls report showed 228,000 jobs created for the month compared to estimates for 140,000.
A solid payrolls report and concerns over the inflation outlook means the Fed is on the sidelines for now.
With uncertainty running rampant and stocks plunging, sentiment and breadth indicators are hitting even more extreme washout levels. In this week’s update, let’s take a look at the historic magnitude of last week’s decline, various metrics showing capitulation, and what it means for forward returns.
The Chart Report
Following the Liberation Day expansion of tariffs, the S&P 500 experienced a historic two-day decline. The index dropped by the equivalent of a correction over that span, with a 10.5% drop. As you can see in the chart below, the recent action ranks among the worst two-day drops for the S&P 500 going back to 1950. This is also the sixth worst start to a year in history for the S&P 500, which is now down 13.7% year-to-date. It’s also worth noting that every S&P 500 sector is now trading below its 200-day moving average, showing the breadth of the selloff now hitting equities.
The two-day pullback in the stock market is sending measures of volatility sharply higher. The chart below shows the CBOE Volatility Index (VIX) that tracks implied volatility on the S&P 500. On Friday, the VIX hit its highest closing level since the pandemic. Before that, the daily VIX close was only higher during 2011’s U.S. credit rating downgrade and the period around 2008’s financial crisis. Sharp VIX spikes tend to signal investor panic. During past instances of a move over 45, the S&P 500 has seen a median gain of 17% and win rate of 92% six months later.
While the market action felt much more “orderly” during the decline on Thursday, the following day on Friday had the feel of panic selling and margin calls. Even some of the sectors and industries showing recent relative strength were hit hard by selling pressure. That included gold miners, energy, and insurance stocks. You can see that with the massive expansion in net new lows across the major exchanges on Friday. The bars in the chart below plots 52-week new highs minus new lows going back to 2022’s bear market. You can see the expansion in net new lows across exchanges hit the lowest level since 2022.
While Fed Chair Jerome Powell is downplaying any chance of an interest rate cut soon, the bond market is starting to think otherwise. In their March projections, Fed members only saw two rate cuts happening this year. But after growing uncertainties over the economic outlook and surging volatility, market implied odds are pointing to four quarter point rate cuts this year. The bond market is also pricing something similar. The chart below plots the two-year Treasury yield relative to the fed funds rate. As you can see, the 2-year tends to lead changes in the fed funds rate, and is currently 0.82% below fed funds. That implies three to four 0.25% rate cuts ahead.
The severity of the stock market’s drawdown will ultimately come down to the outlook for the economy and what it means for the earnings picture. That impacts both the magnitude of the drawdown as well as its duration. The chart below separates S&P 500 declines of 10% or more into recession versus non-recession episodes, and the ranks the duration of the correction by time. You can see the median drawdown lasts 282 days when recession hits compared to 60 days for no recession. We are currently 32 days into this correction.
Various measures of investor surveys continue pointing to extreme fear among investors. That includes the AAII survey of retail investors where bearish views hit 61.9% and is the third highest bearish reading on record. More evidence shows that actual positioning is reaching bearish extremes as well, which could be a bullish contrarian signal. A sentiment indicator based on positioning from Goldman Sachs is currently running near extremely low levels. Historically, that’s led to a short-term bounce in the stock market with the S&P 500 returning about 2.5% over the next two weeks.
Heard in the Hub
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- How breadth flagged the start of the correction in February.
- My favorite tool for spotting changes in the S&P 500’s momentum.
- A rundown of charts showing relative strength that could lead the next rally phase.
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Trade Idea
Skyward Specialty Insurance Group (SKWD)
Rallied toward the $55 area in December then retraced part of the prior uptrend. Recently testing $55 again and making a smaller pullback against the broader market decline. Watch for the pullback to reset the MACD at zero. I’m watching for a move over $55.
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S&P 500: Is a massive buying opportunity at hand? was originally published in Coinmonks on Medium, where people are continuing the conversation by highlighting and responding to this story.
