Inside Markets — Clearing Event?

US economic sentiment continues to deteriorate faster than the hard data. Sentiment often leads hard data but there’s also a risk of ‘over rotating’ as strong household/corporate balance sheets can likely withstand an uncertainty-induced soft patch. In our view, you need credit deterioration and/or mass layoffs to engage the negative feedback loop that creates a sustainable recession. Credit spreads and weekly jobless claims should be closely monitored but neither item has signaled an imminent slowdown/recession yet.

Equity markets need clarity on trade policy before making a bottom, but we don’t expect the April 2 tariff announcements will be the clearing event that some hope. In yesterday’s interview, Treasury Secretary Bessent discussed the likelihood that trade negotiations would follow the tariff announcements. However, recent experience has shown that negotiations usually follow a period of retaliation and escalation.

The relief rally in equities could extend a bit higher with Powell assuaging macro concerns tomorrow followed by month-end/quarter-end rebalancing starting as early as next next week. The recent pullback in equities and rally in bonds has left pension/sovereign wealth funds underweight stocks by ~$135B. As noted above, we don’t expect the April 2 tariff announcement will be a clearing event but look for that later in Q2. Of course, markets discount future events and expect equities will rally 2-3 weeks before ‘trade clarity’ attained.