Progress, but Not Out of the Woods Yet

Jim Denholm
Apr 15
4 min read

Markets continue to trade on heightened emotion and uncertainty around what tariffs might mean for financial markets.

We will provide today's brief update, and will follow up with a more detailed report later this week.

Brief Update:

The selloff could very well be over.
- This would mean that the low point in the market last week may have marked the end to this pullback.
- Markets are back to where the breakdown occurred.
- There is enough confirmation following the strong rebound last week that a low indeed may have occurred.
Last week was the 4th most volatile week in market history by one measure (average true range).
Multiple sentiment readings were historically extreme, which is typically a positive for markets.
On April 2nd, markets rose nearly 10%. While this is a positive on the surface, big moves higher like this are indicative of a more negative environment, so we can't rule anything out yet.
Look for tariffs to continue to be in the news, but the market should shift its focus from fear of the unknown to a more rational analysis of tariff consequences. We will update you as necessary.

When data gets extreme, you likely feel very uncertain about what to do.

But from a investment strategy and decision-making standpoint, last week was fairly easy.

It didn't feel easy.

But the proper course of action was very clear: hold positions until the panic subsides.

Now, the panic conditions have begun to subside.

What now?

S&P 500 Index

Let's look at the S&P 500 Index to see what we are dealing with.

Following the recent peak in February, a normal correction developed into April.

Then the Trump tariff tornadoes started.

In three days, markets crashed 13%.

Then the Trump tariff tranquilizers kicked in.

On April 9th, tariffs were frozen on basically every country except China, and markets exploded higher in one of the biggest one-day gains in market history.

We now have two distinct scenarios at play, with dramatically different outcomes.

The lows from last week mark the end of the mini-bear market. This is by far the most likely scenario.
This is only the middle of the decline. The large spike higher last Wednesday actually puts the risk of a major decline on the table, albeit at a very low probability (less than 5%).

Let's look at these two scenarios and what they may look like.

Scenario 1: The Lows are In

There is enough confirmation in the data to suggest the decline could be over.

If this is the case, the low point in the market last week (S&P 500 at roughly 4800) may have marked the end to this bout of volatility and should not be broken to the downside.

This doesn't mean that volatility is over.

It just means that the prices from last week should not be breached to the downside.

We view this as the most likely outcome.

Scenario 2: Halfway Done?

The unfortunate scenario that emerged from the massive gain last Wednesday is that these types of huge gains in one day tend to happen during major bear markets.

The chart below shows the times since 1950 that the S&P 500 has risen over 5% in one day.

There is a lot of data in this chart, so let's point out a few things:

Look at the dates. Most of these occurred in 1987, 2008 and 2020. Not great company.
Short-term returns were mixed. Markets tend to backfill and digest large gains like that.
Long-term returns were fantastic.

This may sound strange, but it may have been better if the market gained 10% over the course of three weeks instead of three hours.

That would allow for the market to establish a better foundation on which to move higher from.

Instead, it actually introduced a wider range of possible outcomes. "Fatter tails" for the bell curve fans out there.

This scenario has an extremely low likelihood of happening, so don't let this scare you. We will let you know if you should be scared of this scenario, and at this point the answer is no.

But we must be aware of the possibility that this could indeed turn into something worse.

Again, don't dwell on this scenario, just be aware that it is a possibility and we are monitoring it.

What to Look For?

First, we will continue to send updates as developments occur.

But in the market over the coming week, these would be positive signs:

Smaller daily moves in stocks.
VIX continuing to decline. Below 20 is the target. It is currently at 30 and went up to nearly 60 last week.
Strong gains late in the day.
Neutral to slightly negative discussion of tariffs during earnings calls.
Progress in tariff discussions.

Negative signs we should look for:

Increased stress in the bond markets. (The MOVE index and credit spreads are good indicators.)
Currency volatility increasing.
Political retaliation/escalation.
Low volume on up days, and high volume on down days.
VIX stays above 30.