Inside Markets — Near-Term

Last week’s small gains in the SPX and Nasdaq 100 (NDX) were largely driven by the absence of incremental tariff headlines, oversold conditions/cleaner positioning, better-than-feared macro data and mostly dovish Fed takeaways. We expect the relief to continue this week as quarter-end rebalancing flows heavily favor equities over fixed income. Those rebalancing flows will be exhausted before month-end and the relief rally will fade with a likely retest of the lows sometime in early April. Reports suggesting that April 2 tariff announcements may be more targeted than feared drive outsized gains today, but tariff announcements of any kind will likely be followed by a brief period of retaliation and escalation before a longer period of negotiation. It’s possible for equity markets to ‘look across the valley’ to a less uncertain trade backdrop, but the uncertainty to date has put the market on recession watch, which should keep equity multiples under near-term pressure.

The recent peak-to-trough pullback in the SPX took the index into correction territory (down >10%), which would only be a buying opportunity if a recession can be avoided. Looking at history, there have been 35 equity corrections since 1950 with 12 of those corrections preceding a recession. The average 12-month return for the 23 corrections that did not precede a recession was +12%, while those that did precede a recession averaged +2%.

The US economy came into this period of uncertainty with household and corporate balance sheets in great shape. Equity markets are pricing in a 30% -40% probability of a recession, while credit spreads are pricing in a 7% – 12% probability. Credit spreads remain below levels from October when tariffs weren’t even a topic of conversation, as well as below levels during other growth scares over the last three years.