76report

39d326ab40

May 6, 2025
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76report

May 6, 2025

Epic Recovery

It is almost hard to believe, but stocks are essentially at the same level that they were before Liberation Day on April 2. Measured from the end of March 2025, the S&P 500 declined less than 1% in April, while the NASDAQ Composite actually gained just under 1%.


This April may have been one of the most volatile months in stock market history, but if you had closed your eyes for the past few weeks, it would be almost as if nothing happened.


Of course, quite a bit did happen.


The two days following the April 2 tariff announcement led to more value destruction in stocks than any two day period ever.


The S&P 500 declined 10%, while the NASDAQ Composite fell 11%. More than $6.5 trillion of market value was erased between the time markets opened on Thursday, April 3 and closed on Friday, April 4.

S&P 500 and NASDAQ Composite

Total Return (3/31/2025 - 5/5/2025)

We also saw a historic spike in the CBOE Market Volatility Index (VIX). The VIX, which is sometimes called the “fear index,” measures expected volatility in the S&P 500 Index over the next 30 days.


When markets are calm, the VIX is usually in the 15 to 20 range. It spiked as high as 52 on April 8.


The only other time frames in which the VIX got this high over the past 20 years was during the Covid panic in March 2020 and the Global Financial Crisis in late 2008.

CBOE Market Volatility Index (VIX)

(Last 20 Years)

But that was last month.


Investors at this point need to shake off their whiplash, assess the new scenario, and focus on the opportunities ahead.


As we wrote in the 76report shortly after Liberation Day, two days before he announced the “pause” on Truth Social, Trump really had little choice but to shift course:


“From a long-term perspective, we continue to view a severe valuation adjustment like this as a buying opportunity, especially considering the self-imposed nature of the problem that the market is facing. After potentially underestimating the severity of the market’s reaction to the Liberation Day tariff schedule, the administration has significant incentives to fix the situation.” (Will Trump Pivot?, 4/7/2025)


In our view, the Trump administration wanted to move boldly to address trade imbalances. But it probably underestimated the extent to which both the stock and bond markets would simply reject tariffs on that scale.


To avoid a financial market and economic catastrophe, and the potential destruction of his legacy, Trump had to tell the world he would be taking a more measured approach.


The panic was severe but ultimately short-lived as investors regained confidence that the administration would adapt to market realities.


Not totally out of the woods


To be sure, tariff-related risks definitely remain. Trump has not given up on tariffs altogether, announcing over the weekend an intention to tariff movies filmed outside the U.S.


There is also abundant evidence of an ongoing slowdown in international trade, which can have ripple effects.


The combination of reduced trading activity and greater uncertainty, which prevents or delays investment and decision-making, will probably lead to slower economic growth than we might have otherwise experienced.


Yet, after an intense period of deep pessimism, there are many positives to consider, including…


(1) Tech earnings and investment appear to be on track.


(2) Consumer spending appears to be strong.


(3) Lower oil prices mean less inflation pressure and more room for rate cuts.


The tariff distraction


One of our biggest frustrations with the Liberation Day fiasco is the way it distracted from the stronger elements of the Trump economic agenda.


The tug of war between the U.S. and its trading partners over manufacturing has shifted emphasis from other policy priorities, like promoting innovation and growth through deregulation, energy expansion and tax cuts.


This is not to say that manufacturing is not an important sector of the economy, or that U.S. dependence on China and other potentially unreliable countries is not a valid issue.


Manufacturing accounts for approximately 10% of U.S. GDP and directly employs about 13 million workers in the U.S., or about 8% of the total workforce.


But, notwithstanding oft-repeated claims that U.S. manufacturing has been “hollowed out,” it is worth remembering that the U.S. still produces about $2.5 trillion of manufactured goods annually.


This represents about 16% of total global output (whereas the U.S. represents about 4% of the total world population).


The U.S. now trails China but is still a manufacturing powerhouse, especially when it comes to more technologically advanced products. It’s just that fewer workers are now required to generate this output.


Primarily as a result of automation and other process improvements, the percentage of Americans employed by the manufacturing sector has steadily declined since World War II. This is a trend that appears to have been unaffected by China’s rise.

(Source: Bureau of Labor Statistics)

Remembering the AI revolution


Manufacturing is crucial in many ways, but the biggest long-term opportunity for the U.S. economy lies in technology and the growth industries of the future.


The Information Technology sector now directly accounts for about 31% of the market cap of the S&P 500. But this excludes many “technology platform” businesses like Amazon (AMZN), Meta (META), Alphabet (GOOGL) and Tesla (TSLA) that are all classified as belonging to other sectors.


A broader definition of technology could bring total U.S. market cap well above the 40% level—not to mention all the businesses in other sectors that leverage technological growth and innovation and directly benefit from tech-driven demand (for electric power, for example).


A big part of the recovery in markets recently is that investors are returning to the AI theme that had propelled stocks upward, especially after Trump’s election (until mid-February when tariff fears took over).


The AI narrative quickly came back into focus at the very end of April, when Microsoft (MSFT) reported strong results that sent the shares up approximately 10%.


CEO Satya Nadella offered a wide range of insights that pointed to strong AI adoption and demand, with about half of the company’s 33% growth in cloud computing (Azure) being driven by AI services.


Another highly encouraging tech development was NVIDIA (NVDA) CEO Jensen Huang’s visit to the White House on April 30. Trump’s introduction, and Jensen’s comments, are worth viewing.

Trump with “Smart Cookie” Jensen Huang

AI data centers have enormous energy requirements. Jensen emphasized the critical role of energy in the development of AI in the United States and praised Trump for recognizing this and promoting a strong energy policy.

We're going to build NVIDIA's technology, the next generation of that, all here in the United States. Without the president's leadership, his policies, his support and very importantly his strong encouragement, and I mean strong encouragement, frankly, manufacturing  in the United States wouldn’t have accelerated to this pace. - Jensen Huang (4/30/2025)

Trade disruptions are a problem for the broader economy but do not appear to be having a major impact on AI spending and investment. The AI buildout is being driven by extremely well-capitalized businesses like MSFT that are pursuing long-term strategic goals.


Additional supportive data points came out of data center REIT Digital Realty (DLR) in their April 24 first quarter earnings report, which has led to an approximately 8% increase in the share price since.


DLR management pointed to broad-based demand, fueled by AI, and marginally lifted guidance.


The consumer is intact


Consumer spending represents approximately 70% of the U.S. economy.


Credit card giant Visa (V) probably has as direct and comprehensive a read on consumer spending patterns as any business out there. As we recently noted, V management told shareholders on April 29 that they “have not seen any signs of overall consumer spending weakening.”


When it comes to consumer spending, the recent recovery in stocks is important in and of itself. A weak stock market translates into negative wealth effects and hurts sentiment.


Moody’s recently estimated that 50% of all consumer spending is done by the top 10% of households in the United States. High asset prices sustain the most important consumers, who sustain the entire economy.


Oil falls


The biggest casualty of Liberation Day has been the energy sector.


The Energy Select Sector SPDR Fund (XLE), a major ETF that tracks U.S. energy stocks, fell 14% in April. (The total return of all other SPDR sector ETFs only varied from -4% to 2%.)


Tariff disruptions mean reduced international trade, which translates into lower current and expected demand for oil, which is primarily used for transportation.


Oil has now fallen below $60/barrel, as Saudi Arabia refuses to restrict production despite weaker demand because it wants to punish OPEC cheaters.

Oil was above $70 at the end of March and has lived above $70 since early 2021. It is worth noting in this context that the U.S. has experienced about 18% inflation over the past four years, so oil is even cheaper now in real terms.


Low oil prices represent a profit headwind for many energy stocks, especially exploration and production players, which could be viewed as interesting contrarian opportunities at this point.


We have allocations to certain E&P energy stocks in our Inflation Protection and Income Builder Model Portfolios that we believe offer significant upside potential as oil prices stabilize and recover.


But cheaper oil is generally good for the rest of the economy. Lower oil prices are like a tax cut for consumers and businesses and are disinflationary.


Commonly used estimates of the impact of a decline in oil prices on inflation rates are in the range of 0.1% to 0.3% (or even higher) for every $10 decline in the price per barrel.


Subdued oil prices take the edge off inflation, which may leave the Fed more room to cut interest rates to the extent we do start to see economic weakness.


A return to optimism?


Trump shocked the world with inordinately high initial tariff rates, which, if ultimately implemented, could have severely restricted global trade. This led to very disorderly market conditions, which further exacerbated downside.


But the administration has recognized the problem and changed course. Tariffs will likely be implemented to some meaningful degree, but emphasis is now on reaching reasonable trade deals.


Treasury Secretary Scott Bessent is spending a lot of time these days in the media and at conferences reassuring the capital markets. Meanwhile, Trump trade advisor Peter Navarro, who originally pushed for the idea of linking tariffs to trade deficits, seems to be taking a backseat.


The focus is also back to growth and innovation, the themes that drove stocks to all-time highs in the months following the election. Despite the recent bounce, the S&P 500 remains just over 8% below its closing high on February 19.


Investors who bought amidst the panic in early April have been quickly rewarded. Volatility has ebbed, and prices have generally reverted to pre-Liberation Day levels.


To the extent the Trump administration chooses to focus on growth rather than trade wars going forward, the factors that drove stock market strength in early 2025—rapid technological progress, a generally healthy consumer and moderating inflation—largely remain in place.

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