The Trend Is Still Your Friend
It’s been a rollercoaster ride for investors the past few weeks, to say the least. Stocks plummeted after President Trump announced “reciprocal” tariffs on U.S. trading partners that surprised the markets with their size, scope, and speed. A week later and just hours after they went into effect, Trump paused the reciprocal tariffs on most countries (with China being the notable exception) for 90 days. Markets responded favorably with powerful short-term rallies. Still, markets remain volatile as they continue to react to the near-daily tariff announcement.
Taking note of the stock market’s long-term trend can be a useful exercise during periods of high uncertainty like today. Trend analysis can be helpful because historical prices and trends can often provide clues about future market behavior. It’s predicated on Newton’s First Law of Motion, which states, in part, that a body in motion tends to stay in motion.
The exhibit demonstrates that even with the recent stock-market selloff, global stocks remain in a multi-year uptrend. What’s more, the deep market correction ended right on a trendline that has proved to be good support during other selloffs within this multi-year bull market.
Exhibit: Global Stocks Remain in a Multi-Year Uptrend
Source: StockCharts.com, Clayton Wealth Partners.
To be sure, risks remain for the global economy and financial markets. Trade-policy uncertainty has led to a tremendous loss of confidence for consumers and businesses, where their hesitation could lead to a chilling effect on the economy. Even with Trump walking back, for now, from the most significant tariff scenario, tariffs still set to go into effect represent a tax shock to commerce totaling hundreds of billions of dollars. And to the extent that tariff costs are passed along to consumers, inflation could re-accelerate.
The other part of Newton’s First Law of Motion states that the body will stay in motion unless acted upon by an external force. Any of the risks just mentioned have the potential to be an external force strong enough to knock global stocks off their long-term trajectory. But for now, the trend is still your friend, which will be important to continue monitoring.
Bullish
- With the current stock-market correction, valuations are much more reasonable.
- The Fed has made good progress in reducing inflation since 2022.
- The most attractive yields for fixed income and cash in years.
- Credit spreads remain contained.
- Consumer and corporate balance sheets generally remain healthy.
Bearish
- Global economic growth is slowing.
- Policy uncertainty is having a negative effect on consumer and business confidence.
- Housing affordability remains at a decades-low.
- Leading indicators of unemployment are generally trending down.
- Delinquency rates on consumer loans are rising.
- Russia-Ukraine war, Middle East conflict, and other geopolitical concerns.
- China is experiencing a growth recession, with deflation fears growing.
- Federal debt and deficits have ballooned.