Tariff concerns have caused the S&P 500 to fall 7% since reaching its all-time high on February 19th. This 7% decline has pulled the S&P 500 back to its 200-day moving average, which it briefly broke below on an intra-day basis yesterday but managed to close back above by the end of the trading session.
As we have mentioned in the past, the 200-day moving average is an indicator of the broader trend of the market (a rising/declining 200-d reflecting a broader uptrend/downtrend) and acts as a level of support for pullbacks during uptrends, and a line of resistance during downtrends (see below).During President Trump’s first term (Trump 1.0) there were four episodes of market weakness related to tariff concerns that caused 5-10% pullbacks in the S&P 500 that also brought the index back to (or close to) its 200-day moving average. Once that degree of pullback occurred, there was minimal additional downside in terms of either price or time. In other words, the stock market weakness caused by trade war concerns provided excellent buying opportunities every single time during Trump 1.0 (see green circles, next chart).
During the 2 instances of greater declines in the S&P 500 during Trump 1.0 - the 20% decline of the fourth quarter of 2018 (excessive Fed tightening) and the 37% decline in the first quarter of 2020 (Covid crash) - once the S&P 500 reached its 200-day moving average, it continued its decline suggesting greater headwinds for stocks lied ahead.
It’s our bias to treat this recent pullback as analogous to the 5-10% declines seen during Trump 1.0 as we are not seeing the depth of deterioration in our macro models and breadth of selling that suggests significantly further downside lies ahead, such as what transpired during the deeper 20% and 37% declines of Trump 1.0.
If we see further deterioration in our models, we will adjust accordingly. But for now, we think the correction is close to a bottom.
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Best Regards,
VGA Investment Team