Pain Trade
May 14, 2025
The average peak-to-trough decline in a recession-driven bear market is ~34%, while historical bear markets (peak-to-trough declines >20%) without a recession have all been major buying opportunities. The 90-day U.S./China trade détente matters because it reduces the probability of recession. Why? First, it temporarily reduces the effective U.S. tariff rate to 14% from 24%. Second, the 90-day window will likely generate some pull-forward of demand and will allow time for more announced trade agreements, which will likely include some increased U.S. investment (a positive for GDP). In addition to incremental trade agreements, it is important to stay open to the possibility of a rollback in 20% fentanyl-related tariffs on Canada, Mexico and China.
The SPX gapped up and through technical resistance in the 5750-5785 range this week, which likely marks a transition back to a low-volatility bullish trend. The VIX has already moved back levels below 20 and has a strong negative correlation after breaking key technical barriers. Yesterday, we cited the technical adage that old resistance becomes new support – and we mark new support at 5600. The near-term (into the summer) upside target for the SPX is in the 6150-6170 range.
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