by Jason Norris
Director
Equity Research and Portfolio Management
"I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody." - James Carville, American political consultant
This week, equity market volatility continued due to last week’s announcement of global tariffs. Investors, attempting to handicap the potential impacts on the U.S. economy and corporate profits, caused a bond market rally by selling risky assets (stocks) and buying safe assets (government bonds). However, something changed over the weekend. The 10-year U.S. Treasury yield started the week at 3.9% and, by Tuesday evening, had reached 4.5%.
Source: Bloomberg
Typically, bonds don’t move that much that quickly; thus, investors started to raise some red flags. There was a lot of speculation on “why” this was occurring and none of the reasons were good. Yield volatility continued Wednesday, and by mid-morning, the Trump administration announced they were postponing the reciprocal tariffs for 90 days, setting off a historic rally in equities, with the S&P 500 rallying 9.5% in one day, the third strongest percentage gain since 1950. The president stated that “people… were getting yippy… a little bit afraid.” The power of the bond market.
U.S. Treasuries are the lifeblood of the global finance and trade system, otherwise referred to as “the plumbing.” If there is any disruption in this market, which results in reduced confidence among participants, uncertainty increases and usually results in higher borrowing costs and less liquidity. What we saw earlier this week was due to “bond vigilantes,” a term coined by investment strategist Ed Yardeni in the early 1980s. It’s meant to describe bond market participants selling bonds, thus reducing the bond value and increasing bond yields. Usually, bond vigilantes act when they are unhappy with monetary or fiscal policy actions, thus demanding higher interest rates for their investments. Historically, this has resulted in behavior change, and it held true this week.
The postponement of the reciprocal tariffs also resulted in the third-largest daily gain in the stock market since 1950. However, when looking back at those outsized return days, they don’t necessarily happen when things are getting better. The table below shows the 10 largest one-day performances for the S&P 500. When these days occur, we don’t know if things will improve or continue to deteriorate.
Source: Goldman Sachs Research
We believe that markets will continue to remain volatile as the economic impact of the tariffs has yet to be fully felt. According to the University of Michigan, consumer sentiment is back to the lows of the early 1980s. We do believe we will see a slowdown in economic growth this year. However, we are not forecasting a recession. The employment picture is still strong, with the unemployment rate at 4.2%. Consumer spending remains healthy, according to Bank of America and JP Morgan comments. JP Morgan stated that their retail customers had seen a slowdown in the lower-income consumer market; however, the bank stated that their customers on the lower-income spectrum increased spending in April. Thus, with these mixed messages, uncertainty will persist.
Takeaways for the Week
The S&P 500 delivered its best week since November 2024, rising just under 6%. However, it is still down 12% from the highs of February
The overhang of the impacts of tariffs will persist as current tariff rates are still higher than those enacted in 1930 when tariff rates last peaked