As the markets approach a holiday weekend, the atmosphere is anything but calm. Instead of the usual lull, there’s continued volatility, with the VIX volatility index reaching levels not seen since October 2022.
For ten straight sessions, the VIX has remained above 30, marking the first such streak since the final days of the last bear market.
This ongoing volatility has led analysts to reconsider their expectations for the economy and financial markets. One such analyst is Michael Kantrowitz, the chief investment strategist at Piper Sandler, who has a rather unique theory about the situation.
He suggests that the key to understanding President Trump’s economic actions lies in a simple idea: the “Trump put.”
What is the “Trump put”? According to Kantrowitz, it occurs when the VIX exceeds Trump’s approval rating. Simply put, the more turbulent the markets become and the lower Trump’s approval rating drops, the more likely it is that his administration will take action to stabilize the situation.
This, Kantrowitz believes, is the “reaction function” that governs Trump’s decision-making.
While this theory may sound like a joke, Kantrowitz is serious about its implications. He even has an “ocular regression” model—essentially, a casual eyeball estimate—that predicts a 6% drop in S&P 500 earnings by July.
This forecast is based on the idea that the market usually leads earnings estimates by a few months, but even if his predictions come true, he believes investors might still look past these warnings.
He writes, “From here, the markets will continue to react to changes in uncertainty and risk, mainly driven by policy headlines.”
He adds that shifts in uncertainty will continue to affect price-to-earnings (P/E) ratios, with a decrease in uncertainty providing fuel for expansion. If there’s a significant change in Trump’s policies, he suggests that the markets could see relief, even if the data remains weak.
Kantrowitz also provides an interesting chart that shows the relationship between the S&P 500’s price-to-earnings ratios and U.S. high-yield credit-default swaps.
Both the stock and bond markets, according to Kantrowitz, are currently indicating an uncertain status quo. This means that market multiples are likely to rise, and credit spreads are expected to narrow if tariff tensions ease. However, if tariffs escalate, the reverse will likely happen.
In terms of market performance, the S&P 500 saw a 2.2% drop, and U.S. stock futures are climbing slightly as the day progresses. The yield on the 10-year Treasury remains steady for now, but there are clear signs that the market is anticipating more volatility.
Key Market Performance:
- S&P 500: 5275.7 (-3.32% for the past 5 days, -7.04% for the past month, -10.30% YTD, +5.05% YoY)
- Nasdaq Composite: 16,307.16 (-4.78% for the past 5 days, -8.13% for the past month, -15.55% YTD, +3.98% YoY)
- 10-year Treasury: 4.32 (down by 11.60 basis points over the past 5 days, -25.60% over the past year)
- Gold: 3337.2 (+4.48% for the past 5 days, +9.32% for the past month, +26.44% YTD, +39.38% YoY)
- Oil: 62.43 (+3.64% for the past 5 days, -8.69% for the past month, -13.13% YTD, -23.77% YoY)
The data shows that uncertainty and risk are driving current market behavior. Despite some positive movements in assets like gold, oil continues to struggle, reflecting broader concerns about the economy and geopolitical tensions.
The Latest Buzz:
President Trump has stated that the U.S. has made “great progress” in trade talks with Japan. While Japanese officials have echoed similar sentiments, no significant breakthroughs have been reported yet.
Additionally, Trump’s remarks about the European Central Bank (ECB) and its rate cuts are stirring up further debate, especially as he continues to criticize Fed Chairman Jerome Powell.
On the economic front, initial jobless claims decreased by 9,000 to 215,000, but housing starts fell more than expected.
Meanwhile, the Philadelphia Fed’s manufacturing index dropped sharply, registering its worst reading in two years. These figures suggest ongoing weakness in the U.S. economy, which may be contributing to market volatility.
Taiwan Semiconductor Manufacturing, on the other hand, reported strong first-quarter results, beating expectations with a 60% increase in profits.
The company attributed this to the stability in customer behavior, even amid ongoing tariff discussions.
In related news, Nvidia’s CEO, Jensen Huang, arrived in Beijing for talks following the announcement of new export restrictions. This visit highlights the continued tensions surrounding the U.S.-China trade relationship.
As the markets continue to react to political events and economic data, investors are left wondering: What will it take for Trump to adjust his policies, and how will the markets respond? Only time will tell, but the volatility and uncertainty aren’t likely to subside anytime soon.
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