Around the Horn with LPL Research

Jeffrey Buchbinder (00:00):

<Silence> Hello everyone, and welcome to LPL Market Signals, Jeff Buchbinder here, your regular host with a special Market Signals. I am probably going to talk as little as I have in any of these episodes because we have four speakers today. We have Lawrence Gillum, our Chief Fixed Income Strategist. We have Kristian Kerr, our Head of Macro Strategy, and we have Adam Turnquist, our Chief Technical Strategist, along with myself to try to put this sell off in context to give you the latest news on tariffs and talk a little bit about where we might go from here. It is April 7, 2025 as we're recording this. And here is our agenda, of course. We actually entered bear market territory intraday today. So we define bear markets based on close. So if we don't close down 20% on the S&P 500, we will not call it a bear market, but we did enter bear market territory, so we'll talk about the sell off next more so just updating you on the latest news on tariffs and prospects for potential negotiation.

Jeffrey Buchbinder (01:12):

Then we'll talk to Adam about technicals, what signals he is watching to to tell us a turnaround might be coming. Then Lawrence will talk bonds, and certainly the bond market is getting even more interesting because yields are rising pretty sharply today, which I think probably a little bit surprising for folks as recession risks rise. So I look forward to hearing from Lawrence on that. And then we also have Kristian to talk about sentiment. I guess I got my agenda was a little full, so I didn't put a sentiment bullet here, but positioning and sentiment, we'll hear from Kristian on that again, for guidance on where this market might settle down. And then the week ahead, of course, is more tariff headlines. Nothing else really matters. So we'll do the recap quickly here because, you know, we all know stocks have gotten hammered and we really want to try to look forward rather than looking backward. But you know, 9% down for the five days, most of that, of course, coming at the end of the week. Adam I'll, I'll turn to you on this. I mean, it was clearly ugly. Did anything in the sector leadership or, you know, asset class dynamics stand out to you last week as what looked like indiscriminate selling unfolded?

Adam Turnquist (02:41):

Yeah, I think indiscriminate selling is probably the best description. I don't think risk off really even encapsulates what we witnessed last week. We had record type volumes across the S&P 500 at 97% of stocks actually close lower on Friday. So that is signaling a flush. People selling what they can, not necessarily what they want. And I thought it was interesting going into Liberation Day, of course, a big event that we've all been waiting for, just the lack of implied volatility going into the event. The VIX was in what we call backwardation, but that had started to back off a little bit. So the market wasn't really bracing for impact. So definitely caught off guard to say the least last week. And pretty broad based selling, utilities holding up a little bit better staples, holding up a little bit better last week, but still getting sold and very oversold really, when we look at some of the momentum across all the S&P 500 sectors, a lot of technical damage as well, not only in big tech, but also in even some of the more defensive areas of the market. So definitely a tough week for equities.

Jeffrey Buchbinder (03:48):

Yeah, that's kind of the last phase of one of these big drawdowns is even the defensive stuff sells off. And so we saw some of that. We're seeing a little bit of that today too. But I unfortunately have to admit there's a little bit more downside here. If we don't get any good news on tariffs this week, we'll have to wait and see. Turning to you, Lawrence, on the bond market. We had a good week last week. I mean, we're not having a good day today, but anything in terms of you know, high level, how the bond market performed late last week that you would like to highlight?

Lawrence Gillum (04:24):

Yeah, and I will keep this higher level, but really was a, you know, a good week, relatively speaking for higher quality fixed income markets. So treasuries, agency, mortgage backed securities investment grade corporates all up on the week. But the plus sectors, the riskier sectors within the fixed income markets traded in concert was what we saw out of the equity markets. So, high yield bonds, lower preferred, lower emerging market debt lower. So we really did see kind of how we would expect the bond market to play out during any sort of economic slowdown, recession conversations picking up with the high quality fixed income sectors outperform the plus sectors. As you mentioned, the price action today is a little bit different. We'll get to that when we get to the fixed income section. But last week traded relatively in line with what you'd expect the bond market to do in these types of economic and equity market volatility episodes.

Jeffrey Buchbinder (05:23):

Very good. So let's move on. So where do we go from here? This is the Weekly Market Commentary for this week, which is posted on LPL.com. I'll be quick with this, because you all know high level what's going on here. You know, Trump imposed these really adverse tariffs, right? The market was really not prepared for anything more than 10%, possibly a little more. And if you do the math and put in all the tariffs that have been announced and what potentially is yet to come here, one research shop, Evercore, I predicted that you'd be at 27%. That was not on anybody's bingo card. Strategas and I guess most of the strategists that are doing the math on this are looking at maybe more of a 20% tariff rate that is still higher than what the market was prepared for.

Jeffrey Buchbinder (06:18):

We thought we'd come in maybe in the low to mid-teens, but then quickly negotiate those down. Now we're coming in at 20, and it looks like we're not quickly negotiating those down. So the potential for tariffs in the mid-teens to stick is certainly higher than we thought, higher than the market thought. And that's why you're seeing the market sell off so violently here. Since the April 2 announcement. The Asian countries, particularly China, were hit the hardest. Vietnam, another one hit the hardest, although they've already offered to go to zero tariffs. They've already offered, they've already started negotiations, at least in the headlines. And so you know, the Trump administration said they'd fielded something like 50 countries' calls already. So the negotiations will happen and probably bring these rates down. But with China, that's going to be a real tall order.

Jeffrey Buchbinder (07:14):

Clearly these trade tensions and the objectives of the Trump administration are really inconsistent with a quick compromise on China. But hopefully we'll see these rates on other countries come down pretty quickly. Here are the countries you really need to focus on. As we walk through in the Weekly Market Commentary, it's Mexico, China, Canada, and the European Union led by, of course, Germany. I mean, Japan matters. Vietnam matters, especially for countries that are manufacturing a lot in Vietnam. Many moved from China to Vietnam during Trump 1.0. But really, it's maybe those, we'll call it five countries slash regions that you need to focus on. I guess before we go into the charts, I'll just open it up to anybody who wants to weigh in anything on the negotiations that you've seen in the headlines that give you confidence that any of these countries could actually see lower rates right away?

Kristian Kerr (08:18):

Well, you know, I think more importantly, the markets are sitting here thinking, you know, they want to be somewhat comfortable that we've gotten to that point of peak pessimism, and we just haven't, we haven't seen it yet. Now that could easily change. You know, we come in and tomorrow and we start seeing deals getting done. I, you know, I think that would go a long way. But clearly, you know, kind of with what's going on with China, where that just seems to be ratcheting up a little bit with what happened Friday and then this morning with some of the tweets from our president you know, it's, the markets are just wanting something to show that we're kind of, this is going to keep escalating and getting worse. And until we see that, it's just difficult to be able to, you know, put a stake in the ground and say we've reached that peak pessimism point. But, you know, it's probably closer than we think or hopefully it is. Is kind of just my high level take here.

Jeffrey Buchbinder (09:15):

Yeah, the, so on that headline, which the White House subsequently refuted that they were looking at a 90 day pause in tariffs for everyone except China. Anyway I think the S&P intraday jumps 7%. So clearly we are a coiled spring <laugh>. And so if the news starts to get better, this market could move. I'll ask Adam here in a minute, maybe where we could go if we do bounce, but let's, so Adam, let's get into the charts here and talk about this. So, next level of support, I think is probably the number one question that you get. I don't get too many questions on technicals because people know I'm a fundamental guy, but, so what's the next level of support? And you know, what could happen if we break that?

Adam Turnquist (10:04):

Well, we took out the, the August lows last week. That was a big one. So now that leaves us kind of near the April 2024 low, right around 4,950. Interestingly enough too, that's the qualifier for bear market territory. If you take a 20% draw down from the February high to right around 4,950, that gets you to that April 2024 low. If we break that level as we did intraday, there's a 4,820 level on the S&P 500, that's a 50% retracement of the bull market run from October 2022 to those February highs. The rule of thumb among a lot of technicians is that the most common retracement is right around that 50% mark. So that would be right in line with price action intraday. We got very close to retesting that. And it also lines up with the 2022 highs, right around 4,800. So that's going to be a big level.

Adam Turnquist (10:59):

If we get some additional selling pressure today, we have a very big range on the index as well. A lot of times you'll see these big ranges on the index near market low. So something we're watching, of course, volume as well. And then how oversold we are when we look at the middle panel. That's the percentage of stocks with a Relative Strength Index or RSI reading of less than 30. That's the technical threshold for oversold levels. You can see there 46%, that's the highest it's been since the correction lows of 2022 or 2023. And then just the Relative Strength Index. That momentum oscillator is at 23. That's the lowest level, meaning the most oversold. The index has been based on that indicator since March of 2020. So a lot of technical damage. We're starting to see maybe some support around those retracement levels and that the 2022 highs, very widespread oversold conditions. So for maybe if we're playing horseshoes, we'll call it close enough for the long-term investor, when you start thinking about the risk versus reward here for playing darts, I don't think you can call the bullseye here yet, but I think we're getting pretty close. If we're just looking at pure technicals, we're ignoring the headlines and the why, and we're just looking at the what. And when we look through our checklist of trying to identify a market bottom, I think we can make the case here. We're getting close.

Jeffrey Buchbinder (12:27):

Yeah, there I go back to the news flow. Once the news flow gets better, a lot of these ingredients for market bottom are in place. And that doesn't mean that we're going to necessarily go off to the races when the headlines do get better. So let me ask you that question again. So where, where could we rally to? It looks like the way you've drawn this chart that there's, you know, a little bit of runway above 5,132. Where do you think we could go?

Adam Turnquist (12:56):

Yep. So 5,132, that's another retracement level. You have the, the September lows 5,400, you have the summer highs of last year, right around 5,667. So there's some decent upside. I'm not sure if it's going to be that v-shaped recovery, I think investors might be hoping for, given the headlines that we have to navigate around. But I think establishing a floor here and some more offensive leadership will be a good sign. So some potential upside there. And I think you, when you zoom way out and you look at the overall trend for the market, going back to the pandemic lows of March of 2020, you tie that to the bear market lows of 2022, and you're still in this, we'll call it bull market uptrend, even though we're flirting with, with breaking those levels in this latest pullback. But we'll, more to come this week in terms of if we get that capitulation point.

Jeffrey Buchbinder (13:49):

Yeah, and you can also, you know, haircut the PE, right? We were at 23 times not long ago, and now we're at 18. Use a PE like that and haircut earnings from tariffs, and you can still get to 4,800 pretty easily. So I think even, even some of the bearers are starting to get interested in stocks down here. But let's keep it on technicals. The you know, this washout, I mean, you can define washout selling a number of different ways, but based on what you're seeing in breadth, that seems to be a washout here as well, Adam, right?

Adam Turnquist (14:24):

Pretty much, especially when we look at the top panel there, that's the percentage of stocks above their 20 day moving average. Historically, anything below 10% in that indicator has overlapped with a correction low or bear market low. Of course, it doesn't mark the day it occurs, but that's one of the metrics that we look at. And then when we zoom out a little bit longer term in terms of breadth, percentage of stocks above their 200 day moving average, that's the bottom panel at 23%. I checked that intraday, we got down to 18%. Now, when you have a bear market without a recession, that averages right around 10 to 12% when you have a recession, as we did in, in March of 2020, or the global financial crisis, you're talking low single digits, just to give you some context there. But getting very close to getting a washed out signal on that longer term breath measure as well.

Jeffrey Buchbinder (15:19):

Yeah, and we priced in a pretty high likelihood of recession if you, if you assume you know, recessionary declines are around 25% by some you know, you depends on which ones you include and exclude. But you know, if you've gotten like 19 out of 25, that tells you the market's may be pricing in a 70% chance of recession. So a lot of a lot of damage certainly is done here. Let's turn to the VIX Adam. You know, I guess this didn't quite get as high as the last summer highs in August, but it came pretty close. Does this check the box as a panic fear driven sell off? That might be a contrarian bisignal.

Adam Turnquist (16:03):

Here's another one that's probably close enough in terms of hitting that, that high of last year, that that one comes with an asterisk as well. There's some debate back and forth on, on that VIX intraday high, but we had a 60 handle at about 3:00 AM on the VIX Sunday night or Monday morning. That definitely qualifies as panic coming into the VIX. And you can see we backed off that level a little bit. Now, when you look historically and you back test the VIX, what level really matters for a capitulation in terms of seeing above average returns? And we found that in intraday high on the VIX above 30.1. That's the qualifier where it becomes significant. And that's a top decile reading. We're obviously well above that with a 60 handle. That's probably in the top 99th percentile of VIX prints, intraday high. So good sign of panic here on top of oversold conditions.

Adam Turnquist (16:57):

And those washed out conditions that we talked about, you can see it as well that panic going into the market in the shape of the VIX curve. Now, normally the front month or spot VIX trades at a discount to the longer dated contracts, which require a time premium. When there's panic and investors rushing to hedge positions, you'll see that invert and it's called backwardation. And we had a surge in the spot VIX trading above in this example, the six month VIX futures at 20 almost 24 that's historically high, and also overlaps with usually near or at capitulation points in the market. Book call ratio is another metric that we look at that nearly got to two standard deviation move on that bottom panel. I think, I didn't get the update today, but we're on Friday at 1.22. That means there's a lot of put buying in the market versus call buying as investors are panicking here. And that is, again, nearly at a statistically high level. And those are, you often get a big spike in that put call ratio at or near market bottom. So some good signs and some of these other metrics that we look at outside of just price action on the index.

Jeffrey Buchbinder (18:05):

Yeah, certainly all points to staying the course here. We, we, we certainly would not panic sell at the lows. Even if there is a little bit more downside, it's pretty easy to see the upside as certainly outweighing the downside now that you're already down pretty much at bear market levels. So thanks for that. Adam anybody want to add anything to the technicals before we go to sentiment and positioning? All right, we'll go to sentiment and positioning. So, Kristian, you're up. I've been hearing a lot about how you know, retail hadn't capitulated, so I certainly want your opinion on that, but you know, what are you seeing in terms of of sentiment surveys and has there been enough? You know, it's one thing to say that you're bearish, but it's another thing to actually move money to reflect that bearishness. I think that distinction is important.

Kristian Kerr (19:01):

A hundred percent. That's why I think a lot of surveys kind of are lacking in terms of their usefulness because it's a very different thing to put money on the line versus you know, saying I'm bullish or bearish. But this is an, index or sentiment survey that I have followed going back to before the financial crisis. And it's interesting because the way it's constructed it's essentially short-term retail self-directed futures traders that are trading these positions. So, you know when the, we call it DSI, when the DSI gets to sub-10, I've seen it my whole career. So basically out of every 10 traders surveyed, nine of them are bearish. You start getting those levels below you tend to get really meaningful lows somewhere soon, right?

Kristian Kerr (19:53):

Not necessarily right away. And it gets really interesting when you get sub 5%, which we didn't get, we're at 10% right now, but just something to keep an eye on. You know, as we've gotten to what I would call just bombed out levels of sentiment. And you can see on the chart, you know, you go back to you know, basically COVID March of 2020 you know when we got sub-10 didn't bottom right away. But those are based on the levels where we started to feel out you know, started to base in the index then, you know, go back to the 2022 bear market, same type of thing. Started to get to kind of these levels of sentiment. And we started to kind of find that footing before we turn higher. So I think it's just an important kind of indicator that I like that I've been watching for a long time that that suggests we're, we're getting close to an important level from a sentiment extreme standpoint.

Jeffrey Buchbinder (20:45):

Very good. Certainly seems like sentiment is about as bearish as it can get. So here's my question on retail Kristian. They have not really panic sold, at least they didn't on Friday so much. It's based on what I can see our retail investors acting now as far as you can tell?

Kristian Kerr (21:07):

Yeah, it's been, and again, we talked about retail. We're talking about kind of your self-directed Wallstreet Bets type of investor, not necessarily someone that's with an advisor. So, you know, very kind of your gung-ho type of individual trader you know, very aggressive speculation, the, you know, using a lot of leverage, using options, things like that. But yeah, they've been, they, you know, according to some of the data that we look at, they were at, you know, it was one of the highest buy net buy days of them on Thursday during the collapse. That's crazy. And then the next day they did it again and less amounts, but they are still very aggressively buying the dip. And, you know, that is a contrarian signal to where, you know, historically when you had these self-directed traders buying so aggressively into these types of declines, it usually doesn't end, or you get the all clear signal when they finally capitulate.

Kristian Kerr (22:02):

There were some signs of capitulation, I think this morning. You know, I think it, it also explains why, you know, something like Bitcoin has done well, because that's heavily influenced by retail traders. They were obviously putting money into the market in the things they like. So I think Thursday, Friday with crypto kind of holding up probably came from that as well. Again, you don't need to see this. It not a must, you know, it's just another thing on that checklist that we're looking for that if you were to see kind of this cohort of investors capitulate, it'd be a very strong sign that we've got a a more meaningful low in place that that, that we can hang our hat on a little better.

Jeffrey Buchbinder (22:43):

Yeah, I like hearing that capitulation word because that you know, I was in this business during the financial crisis, certainly during the pandemic even the.com burst in 2000, right? And that these types of environments where you see that capitulation again, that indiscriminate selling the high VIX, the put calls, like Adam said, the, these, again, you don't know if it's that weak, but the bottom is very close as you price in max pessimism. So certainly the high volume on Friday, Kristian was more evidence that it was, you know, potentially a capitulation lower, at least very close to one. because Even though, you know, retail was, maybe retail was aggressively buying the dip by that measure you just showed this is maybe evidence that people were just either buying the dip or selling aggressively because the volume was massive.

Kristian Kerr (23:42):

Well, I think it goes to Adam's numbers, right? If it was 97% to sell the volume, the 3% was probably that cohort. But no, I mean, I think we stop and think about kind of where we are, the decline, I mean, we basically started selling off what, in February. So we've had weeks of, of going down, but it's been very, very orderly. You know, I I've even mentioned a few times that from a global investor perspective it hasn't really felt like risk off because money was being taken out of the U.S. markets and going to international and, and, you know, those markets were doing well, and it didn't feel like a risk off. And all of a sudden that became very risk off very, very quick over the last few days where did become a global phenomenon.

Kristian Kerr (24:25):

We saw, you know, the Euro stocks 50, which has been doing very well for six months, gave back all those gains in the span of a few days, right? So you know, and I think going back to that, you know when we've had this orderly decline, it's been very difficult to say, well, you know, where are we going to find a base? We're going to find a footing. And it's almost perversely, you want to see this exhaustive move, you want to see this capitulation? I think these large volume numbers suggest that. And historically that's been the case. Now, there is a little bit of potential issue that when you're in kind of this waterfall pattern and you get, you know, a record volume day that you're not going to see it right away, but you're getting very, very close.

Kristian Kerr (25:06):

And I think that's what this highlights, right, is that, that you, we basically started to get that exhaustive phase that indiscriminate selling phase, and at least, you know, some sort of tradable low is probably going to be in place here shortly. Now, whether we get, you know, a major V bottom and, and we're back off to the races from a, from a more cyclical standpoint, you know, you can't say that just given the volatility of the moves impossible to know, but at least some sort of footing for the market is probably closer than you might think given what we're seeing in the headlines, just because of things like this and the sentiment picture as well.

Jeffrey Buchbinder (25:42):

Sure. Yeah, I remember you know, trying to trade the low in 2020 and expecting a retest that really didn't come. I mean, it was the same thing coming out of the financial crisis at times. You can't count on that retest happening, but it does happen more often than not. And so we may see that, we may see a bounce, a double digit bounce, and then we could roll right back over and come back to the lows. It just that's something to watch out for. So let's now turn to the bond market here. You know, unless anybody wants to add anything to any of those comments from Kristian, feel free to jump in and interrupt. But Lawrence, I think maybe your title here is still relatively calm, make sense for credit markets, but does this still make sense for treasuries after what you just went through here earlier in the call? That's been a pretty big sell off here today, so help us make sense of that. And where do you think the 10-year might go?

Lawrence Gillum (26:45):

Yeah, so that is a dated title for sure. We submitted that to compliance earlier today. But you mentioned the equity market sell off. That was about a 7% difference. Just looking at the 10-year treasury yield in a matter of minutes, it was higher by about 34 basis points from the low. So we saw a big whipsaw today on some fake news, apparently about a moratorium of a 90-day suspension or pause on tariffs that turned out to be not true, but it certainly disrupted the fixed income markets, at least the rates market. But even before the volatility in today's market, you know, one of the questions that, that we got a lot coming into today's trading session is why haven't treasury yields fallen more than they have?

Lawrence Gillum (27:37):

So if you look at what took place in the 10-year treasury yield back in September of 2024, we hit around 360. And that's when equity markets were still around all time highs. That was before the Fed even cut rates. So there was an expectation that, I mean, yes, yields have declined, but maybe not as much as what you would expect in this type of equity market drawdown. And a couple things to point out as to why treasury yields have not fallen, ignoring today's price action for now. But the 10-year treasury yield is very correlated to the Fed funds rate, in particular, we'll call it the trough rate. So what markets expect the Fed funds rate to get to over time? If you look back at the the, the market expectations for Fed Cuts back on September of 2024, remember, this is before the Fed even cut rates, but markets had priced in 10 rate cuts throughout 2025.

Lawrence Gillum (28:30):

So the markets were really aggressive in pricing in rate cuts. So that's how we got down to those, around that 3.6% number. As of Friday's close we were pricing in around three or four cuts and I think we could have gotten further, but Jay Powell was in the news on Friday talking about patience again. So we were actually down into the 390s, on Friday until he came out and started you know, taking a wait and see approach to see, to see how these tariffs would actually work out in practice, not just in theory. So we saw a little bit of a sell off there. So it really does matter how aggressive the Fed is going to be or expected to be. As it relates to that 10-year treasury yield markets are priced in again, around four cuts this year.

Lawrence Gillum (29:19):

So we'll see if, if that sticks or not. But if we don't see the, the hard data worsen relative to kind of what we've seen out of the soft data, I mean, we might not get those four cuts. So we could see upward pressure on, on treasury yield. So a a lot of uncertainty the back end of the curve there. The other thing I would point out too is that the curve isn't that steep. So if you look at the difference between the two-year treasury yield and the 10-year treasury yield, you're only gaining about 40 basis points of incremental yield to move from two-year yields out to 10-year yields. It's one of the reasons why we've been adamant about not extending duration in our portfolios, it's just you're not getting compensated to take on that additional rate risk.

Lawrence Gillum (30:04):

Given kind of all the, the issues with issuance and deficits and now stagflation concerns, our view was that we probably weren't going to see the 10-year treasury yield fall much you know, around 375 to 425 has been our target all year. I still think that makes sense absent any sort of deep recession. So I think we're kind of stuck in these levels for the time being. Last comment on kind of maybe why we didn't see treasury yields fall more than what we would expect is that trade surpluses are generally good for bonds. So if you think about our, the trade surplus that we have with these other countries, you know, we buy their stuff. We give them dollars to pay for that stuff. They give us their stuff, and they turn around and use those excess dollars and invest in treasury securities amongst other U.S. Assets.

Lawrence Gillum (30:56):

Of the, call it 26-27 trillion of marketable treasury debt, outstanding foreign investors owned about eight and a half trillion of that. And then of that eight and a half trillion, about half of that is due to trade surpluses. So if the goal, if it really is to you know, reduce those surpluses that effectively means there's going to be fewer foreign dollars investing into our markets at a time when issuance is expected to increase. So there's a lot of things out there that you know, that aren't great for the long end of treasury yield curves. Right now, again, one of the reasons why we've been adamant about not extending duration, why we talk about one- to five-year parts of treasury curves and corporate curves are that sweet spot, because they don't have that or as much risk in those parts of the curve as you see in the long end of the curves. And then finally, and we wrote about this in the Weekly Market Commentary, there are those stagflation risks. So if you want to move ahead one slide.

Lawrence Gillum (31:58):

There we go. So what we're seeing in the fixed income markets is not a good combination as it relates to duration. So what we're showing here is two-year real yields, which are just TIPS yields these are treasury securities adjusted for inflation. And then we're looking at these two-year inflation expectations. They're going in different directions, meaning inflation expectations are moving higher at the same time, growth expectations are moving lower. That's the kind of classical definition of stagflation. Doesn't tend to, you know, work, right, for longer maturity, treasury securities or longer maturity fixed income securities in general. So, you know, I think there's going to be volatility as that tug of war between growth and inflation plays out over the, the rest of this year. You know, the tariffs we've heard are inflationary. That's what, you know, the concern is. But there's also a, a negative growth story associated with that. So until that tug of war goes away we're likely going to see a lot of volatility in the backend of treasury yield curves.

Jeffrey Buchbinder (33:06):

This market is nothing like the 1970s, but we learned in the 1970s that stagflation is not friendly to stocks. So this is clearly a challenge that the markets are going to have to work through. Who do you think wins? Who do you think wins the battle, Lawrence?

Lawrence Gillum (33:22):

It's you know, it's definitely not like the seventies and eighties. That's why it's a delight for sure. We don't think inflation's going to get back into those very onerous levels that we saw back in the seventies but if it does bring back the eighties music, I'm for it. But as it relates to kind of who wins the tug of war you know, I, unfortunately, I think it's probably going to be the growth side. You know, we've seen a lot of economists lately, including our very own Dr. Roach reduce our growth expectations and increase our recession call marginally. You know, our, our our view is that there's only about a 30% chance of recession this year. But certainly that's a fluid number and can change based upon kind of how these trade wars, how these you know these tariff dynamics play out. If the growth story or the growth concerns continue to dominate the inflation concerns, though we could see yields a little bit lower. But I would stick within that, you know, very front end of treasury yield curves up to that five-year tenor if you're, if you're buying treasury securities outright. But it could be pretty volatile until that tug of war you know, figures itself out.

Jeffrey Buchbinder (34:34):

And do we have to worry about China selling our treasuries to try to get a better negotiating position?

Lawrence Gillum (34:40):

That's another a great point. So they are still a very large owner of treasury securities. And if you look at the playbook for Trump 1.0, trying to sell a lot of treasury securities into the market it wasn't as impactful to treasury markets during that time period because a lot of other foreign buyers stepped up and, and bought treasuries, given the, the concern about global growth. But, you know, with tariffs levied across the globe, you know, there's concern about their economies and you know, potentially going into recession as well, which means a bigger demand for their own bonds versus our bonds here in the U.S. so it's a risk for sure that we could see that selling from, by those foreign buyers.

Jeffrey Buchbinder (35:26):

And how about the credit markets? Yep. Have, have you seen anything that tells you that maybe recession is coming and our odds are too low?

Lawrence Gillum (35:36):

This, yeah, to your point earlier, this is still relevant to the slide about all, you know, relative calm in the bond market. And I say relative because it's not been calm, but you know, relative to kind of the equity market, it, we, we haven't seen the same sort of volatility. There's two charts here on the left hand side looking at the corporate credit spreads of the high yield indexes as, as well as the high grade index. And we have seen spreads widen. And so the high yield spreads have widened by about 1.7% over the past month and a half. High grade spreads are higher by about 32 basis points. And that sounds worrisome, and it is, I mean, it, you know, you never like to see spreads widening to that extent this quickly. But if you look back over a longer horizon, what we're seeing is I think just maybe a sell off that kind of gets us back into more normal ranges, if you will.

Lawrence Gillum (36:32):

So despite the 1.7% higher in high yield spreads, we're still only around longer term averages in terms of percentile. So at, I think we're around 425 ish of 427 ish on the for high yield spreads that's right around the historical average. Over time, since 2001, high grade spreads, they're at 1.09% over treasury securities. They're actually in the 33rd percentile relative to history. So it has been an aggressive selloff, but I think it kind of gets us back to more normal levels. If you consider what spreads traded, like during Trump 1.0 high grade spreads were in the kind of the 110 to 140 range, whereas high yield spreads were in the, call it 350 to 450 range. So this sell off has kind of gotten us back to what we would expect or what we experienced under the first Trump administration. I would argue that we're not ready to buy the dip in the corporate credit markets just yet. Given the volatility, given the uncertainty, high yield looks a little bit better because of the sell off recently. But I think you have really have to have a higher premium on spreads to, to get interested given all the volatility that we're seeing in markets right now.

Jeffrey Buchbinder (37:53):

It's interesting that we're at pretty average typical spread levels and we're back to average typical PE ratios Yeah. On the S&P 500. Well,

Lawrence Gillum (38:03):

And I think that,

Jeffrey Buchbinder (38:05):

You can argue that the 10-year year yield is a pretty average typical level if you look at long-term history,

Lawrence Gillum (38:10):

That's absolutely right. And that, I mean, that's one of the things that we talk about. You know, as when we came into this year there was, you know, a lot of concern about valuations. It was part of our pragmatic optimism story that, you know, we thought there was a lot of, you know, reasons to be optimistic, but valuations were not one of those reasons. For credit spreads we've been at or near secular tights over the last couple, couple months one of the reasons why we've been avoiding credit for the most part. So this sell off has kind of gotten us back to those more normal, more average levels.

Jeffrey Buchbinder (38:44):

Yeah. So Adam or Kristian, who wants to weigh in on the bond market, technical observations?

Lawrence Gillum (38:50):

Easy questions only, or?

Adam Turnquist (38:52):

Lawrence, you're going have to call my wife. because I talked to her this morning and I, we've been waiting to refi our house and I said, oh, we're probably at those levels earlier today, and now I have to call her back and tell her just kidding, because they've shot higher. So I might have you break the news to her. You can explain it better. Technically when we look at, at the 10-year chart, for example, hard to ignore what we call a big head and shoulders top pattern that we did break the neckline there at 410, but now we've whipped sawed, of course, intraday above it. I do think it does suggest, you know, we're trending lower really since the start of the year, and yields same thing on the two year, but more probably in this kind of range bound market, it's hard to make the case. We're going to take out those 360 lows from September if we're not talking about a severe recession here. So I think the call from Lawrence you know, 375, four and a quarter, technically that makes sense still as well.

Lawrence Gillum (39:52):

Yeah, I think a lot of it does hinge on the economic data over the next couple quarters. If, we start to see a slowing economy, we could see yields fall from where they are. But given what's priced in terms of rate cuts with four cuts priced in right now and remember the, the dot plot that we, that we got from the Federal Reserve what was it last month showed only two cuts this year. So markets have already priced in more cuts than what they've told us recently. So I wish that the 10-year treasury yield was lower. That would help mortgage rates, you know, be, become more attractive. But you know, it's, I think there's, I think it's going to get, you know, it's going to take a lot to get a lot lower than where we are. And that reason's going to be recession, unfortunately.

Kristian Kerr (40:42):

Yeah. I would just chime in on, on spreads. You know, I think some people in the market were a little surprised by how not dovish Powell was on Friday. And I think it goes completely to what Lawrence is saying that, you know, we're, yes, we've seen a bit of a spike, but it's just basically taking us back to normalized levels. You probably have to see you know, much, much more aggressive widening and spreads for the Fed to feel compelled. Because that's probably where the so-called Fed put comes in is when credit starts to get out of hand, and it's just not, hasn't, you know, it's not there yet.

Jeffrey Buchbinder (41:20):

Yeah, I don't think anybody's counting on a Fed emergency cut inter meeting to save us <laugh>. It's really, I mean, even a cut in May, which seems to be what most expect is probably not going to help offset this too much. What could offset some of this in addition to, you know, a negotiation where the Trump administration backs off some of these high tariff rates is tax extensions, tax cut extensions that could come as soon as June or July, that are getting bigger because they have the revenue from the tariffs to potentially offset it. And they're making progress on this already. Certainly the prospects of recession can light a fire under Congress in this case, in particular, the Republicans to get more done than they might otherwise. So there's enough potential firepower in the tax cut extensions to really you know, help this market stabilize or maybe make a move higher.

Jeffrey Buchbinder (42:21):

Hopefully we're stabilized before June <laugh>, but certainly that's the whole sort of spinach and then candy argument that we've been making here over the last couple of weeks. The better stuff comes later, this is maybe where you know, unfortunately the markets have to take their medicine. So turning to the week ahead, I don't think that any of this data matters, but maybe it'll just go around the horn. Why don't we start with, with you, Adam, what are you watching this week? Either something that's on this page or, or something that's not?

Adam Turnquist (42:59):

I think well, we'll start, I'll take the easy one. Earnings kicking off Friday with the big banks.

Jeffrey Buchbinder (43:05):

Oh, that was going to be mine. And you took it.

Adam Turnquist (43:06):

That'll be an interesting one, but I'll, I'll let you cover that in, in detail, something I'll be listening to. And just the reaction there. Again, to your point CPI and PPI are going to matter, or the inflation metrics that we're going to get. I think just how the market handles some of these support levels, call it that forty eight, twenty level on the S&P 500. Do we start to have some, some intraday reversals? That seems to be the case, at least today. I think that's a good sign. And just where volumes are, who's buying as well. Do we get any type of institutional demand coming back into the market? They really haven't been around for the first quarter. They've been selling stocks. Interesting to see if, with them being relatively light in this selloff, did they take advantage of it and start buying equities? Haven't seen that yet, but something I'll be watching for, for this really to assess the sustainability of a rally here.

Jeffrey Buchbinder (44:04):

Over to you, Khristian. What are you watching?

Kristian Kerr (44:08):

Yeah, I mean well, something that's not on here, I'd say the, there's a lot of, there's a lot of central bankers on the tape expected both in the US and abroad. So, you know, they could have a role here in terms of maybe changing the tide if they are kind of more uniformly dovish. But, you know, like, like you've been saying, bookie, it's, it really comes down to we need some positive news regarding trade. You know, I believe Trump is, has a press conference with the with some members of the Israeli government later today. So say a trade deal gets announced there with them, you know, that could, that could be maybe something that starts sparking the, you know, changes that tide a little bit. So that's really what I'm on the lookout for is just something, anything positive on the trade side to kind of change the negative narrative that we've had in the last few days.

Jeffrey Buchbinder (44:59):

Lawrence, hopefully Khristian didn't take yours.

Lawrence Gillum (45:02):

He did not. That, that is a good one, though. We're playing Family Feud. I would've been like, you know, good, good answer. But no, I think for the bond markets, the Treasury Department has some auctions this week. So we'll see if foreign buyers show up, they have a three-year, a 10-year, and a 30-year auction. Not big numbers because of the 10-year and the 30-year are reopenings, but it should be a good test to see if there is demand out there for treasury securities with the backup that we've seen today. I would think that that would increase the chances of buyers coming back into the market. But we'll have to see that mix between international buyers and foreign buyers, or, I'm sorry, international buyers and, and domestic buyers.

Jeffrey Buchbinder (45:45):

All right, well, you know, mine already, it's earnings. You know, I don't think we're going to get a lot of information in terms of guidance that can help us because companies, management teams are dealing with the same thing we're dealing with, right? We're just waiting to see where these tariffs land after negotiations. But what will be interesting, I think, is how much pressure corporate America is putting on the Trump administration to either negotiate quickly and bring these rates down, or to somehow change their approach to something that's a little less of a recession risk or bear market risk, right? You've seen a lot of headlines over the weekend. Trump administration's under getting a lot of heat, frankly, from a lot of different places. And if they go too far we're going to see job losses, and then they're going to get pressure, you know, not just from stock investors or CEOs, but from working people.

Jeffrey Buchbinder (46:41):

And that's, that's not where they want to be. So there's, it's hard to know where there is a Trump put or a Fed put or any put, frankly, that could put a floor under this, you know, where the weakness and the heat gets too, you know, gets to be too extreme and they back off. But there is a point where that happens. Oh, by the way, there's a little bit of a Congress put here too, where Congress could potentially do something to push back. I'm not counting on it, I don't think we're going to invest around that necessarily, but my only point there is just there are a lot of things that can be, let's call it less negative here and help the markets turn turnaround. So those are some of the things I'll be watching for. Thank you guys.

Jeffrey Buchbinder (47:26):

Really appreciate it. Adam, Khristian, Lawrence. Good around the horn. This is a tough time. It's a lot of complex issues. It's really hard to predict, but so we're just looking, just like all of you looking for better headlines. If we get them soon we think we could get back to you know, the recent highs here before the end of the year might be a bumpy ride to get there, but we think there's a decent chance that that's how this plays out. So thank you for listening to Market Signals. Appreciate your support and we'll be be back with you next week. We'll see if we if we go with the quad box or maybe maybe back to the two speaker <laugh> model next week. We'll just see how volatile the markets are. So thanks again for listening. We'll see you next time.