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April 23, 2025

A Kinder, Gentler, Market-Friendlier Trump

President Trump has softened his rhetoric on key issues that have been weighing on markets, and stocks are recovering. The S&P 500 and the NASDAQ Composite are now respectively 6.2% and 9.4% above their post-Liberation Day lows.

Specifically, Trump spoke somewhat optimistically on the prosects of cutting a trade deal with China. He also backed away from the potentially disastrous idea of firing Fed Chair Jerome Powell.

While predicting Trump’s next move may be as futile as predicting short-term fluctuations in the stock market, we are definitely encouraged by the more market-sensitive tone the President now appears to be taking.

Stocks may be off their lows—but it’s worth emphasizing that they are still down materially for the year and from pre-election levels.

This suggests more upside to come if the White House continues to back away from aggressive tariffs and refocuses on pro-growth economic policies like deregulation, support for tech innovation, and tax cuts.

Speaking to reporters yesterday afternoon, Trump made two key points.

First, he distanced himself from speculation that he may fire Fed Chair Jerome Powell, which he did not necessarily have the authority to do (other than “for cause.”)

As we flagged yesterday, the main risk associated with the President stretching his legal authority and firing Powell was that it undermined the independence of the Federal Reserve. This unnerved markets, whether or not one believes Powell is doing a good job.

Trump clarified yesterday that he has “no intention” to fire Powell.

Market reaction today in part represents relief that Trump is respecting institutional boundaries and avoiding a course of action that would only create more market instability.

Second, Trump made comments that suggested a trade deal with China was achievable and that tariffs on China were likely to come down.

This softening of his position is exactly what investors wanted to hear given that a potential breakdown of U.S.-China trade is arguably the most serious recession risk factor.

145% is very high and it won’t be that high. It won’t be anywhere near that high. It’ll come down substantially. But it won’t be zero. - Donald Trump (4/22/2025)

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Stocks still well off highs

The S&P 500 rallied approximately 1.7% today, after advancing 2.5% on Tuesday. Markets have certainly bounced off their post-Liberation Day lows—but remain well off recent highs.

S&P 500 and NASDAQ

Total Return (Past 6 Months)

On a year to date basis, as of the close of trading today, the S&P 500 and the NASDAQ are down 8.6% and 13.5% respectively.

Relative to their February 19, 2025 all-time highs, before tariff anxiety gripped markets, the S&P 500 and NASDAQ Composite are down 12.5% and 16.7%.

Since October 31, 2024, just prior to the election, the S&P 500 and NASDAQ are down 5.8% and 7.7%.

There is also still a fair amount of risk aversion priced into markets. This is visible in the CBOE Market Volatility Index (VIX).

CBOE Market Volatility Index (VIX)

Past 6 Months

The VIX, also known as the “fear index,” reflects future expected volatility. It remains above 30, well above the 15 to 20 band in which it traded prior to Liberation Day.

Lessons from the pandemic

“Dip buyers” have a habit of buying on the way down but holding off from further purchases as markets recover.

In 2020, the S&P 500 bottomed on March 23. By the end of March 2020, the S&P 500 had already recovered 15.5% from its lowest levels.

In comparison with the current downturn, this is well ahead of the 6.2% improvement from the April 7, 2025 lows that were reached shortly after Liberation Day.

Yet even investors who bought the S&P 500 on March 31, 2020, after that significant bounce off the lows, still achieved a 47% total return by the end of the year.

The main takeaway is that investors looking to take advantage of this market downturn have not necessarily missed their chance.

More Bessent, less Navarro

Markets cratered after Trump unveiled his Liberation Day tariffs because they feared he was truly committed to imposing high tariffs as an economic strategy, rather than as a tool to negotiate better trade terms.

This pro-tariff message was being loudly communicated by administration officials like Peter Navarro and Howard Lutnick, who placed great emphasis on the revenue generation potential.

But now we are getting glimpses of a commitment to a comparatively low tariff future, even with respect to a U.S. adversary like China.

It is possible that the administration initially underestimated the extent to which both stock and bond markets would reject a high tariff policy.

Whether Liberation Day tariff rates were meant as a bargaining chip, a more permanent revenue generation tool, or something in between, no administration can hope to achieve success with an economic strategy that causes markets to go haywire.

The only sensible response is to modify the approach, and this is what we are now seeing.

So long as Trump and his team stay on the path of moderation, it is reasonable to expect risk aversion to gradually come out of the market and for valuations to improve.

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