The market’s huge rally on Wednesday reinforced the valuable advice in my April 4th note: it is usually best to remain calm and do nothing when chaos unfolds. Investors who panicked and sold before the rally missed out on a historic day for the markets, with the S&P 500 surging close to 10%.
In these unprecedented times, it would be a mistake to assume we are out of the woods. This means we need to examine what led us to this point? We have reached this point because of the administration’s attempt to enact tariffs. This created uncertainty, upset investors, and rattled the markets. The stock market’s fall into correction territory signaled that these tariff policies may be ill-advised, while the dollar’s selloff suggested that this could be detrimental to America.

During our annual Focused Wealth Management Firm Economic and Market Update, we illustrated the tight correlation between market performance and U.S. gross domestic product (GDP). As my teammate, Michael Passante, often notes, as long as GDP progresses, the markets tend to follow suit.

Why Did The 10-Year Yield Move Higher?

In the previous commentaries, I said the 10-year Treasury yield serves as an excellent barometer of market uncertainty. On Saturday, April 5th, I visited my brother-in-law who heads Citigroup’s credit portfolio. While we enjoyed espresso together, he shared his insights. He said that on the day prior, the 10-year should have closed in the range of 3.7% to 3.8%. Instead, the yield moved higher, ending at 4%!

Then late Tuesday night, I found myself glued to the action in the 10-year Treasury market until the early hours of the morning. What I observed was quite revealing. I saw the yield surge to almost 4.5%. Remember: bond yields rise when bonds are sold and prices fall. When investors seek safety by purchasing bonds in anticipation of a weaker economy, bond prices rise and push yields lower. Tuesday’s rapid increase in the yield indicated either a significant number of investors expect inflation to rise with a robust economy—counterintuitive to a potential recession from the tariffs—or a major seller had entered the market.

It’s noteworthy that approximately 14% of the government’s outstanding debt is held by Japan and around 11% by China. Given the context of rising tariffs, it initially appeared that Chinese investors were selling bonds in retaliation for the economic policy changes. Soon after, market watchers switched gears and suggested that the Japanese were the actual sellers, likely aiming to repatriate assets as the dollar continued its slide.

We have reached this point because the stock market’s fall into correction territory signaled that these tariff policies may be ill-advised, while the dollar’s selloff suggested that this could be detrimental to America.

Bond Holders Begin to Lose Trust

Even as the administration’s policies pounded the stock market, it tried to do the same thing to the bond market — the largest market in the world. Yet, amidst this turmoil, the bond market reminded us of who is the adult in the room.

Overnight from Tuesday into Wednesday, the 10-year Treasury yield spiked above 4.5%, driven by speculation that a foreign country, such as Japan or China, was dumping bonds. This selloff suggested holders of U.S. government debt wanted to get out of dollar-denominated assets because they were losing trust in the bonds’ traditional safe haven status.

In short, President Trump raised tariffs. The bond market balked and forced him to reverse his policy on Wednesday, leading to the huge stock rally.

Kevin Hassett, director of the U.S. National Economic Council, a knowledgeable economist and good friend from the Union League Club, told reporters on Thursday that the bond market’s decline contributed to Trump’s decision. “Everything was moving forward in an orderly fashion,” Hassett noted. “There’s no doubt that the Treasury market yesterday made it so that the decision to move was made with perhaps a little more urgency. But it was going to happen.” More likely it was the simultaneous decline in equities, bonds, and the dollar that may have done the trick.

To me, all eyes are on the 10-year Treasury to determine which way the stock market moves. They are also increasingly focused on the dollar, which has signaled some trouble. On election day, it cost about $1.03 to buy one euro. By April 11, it took $1.14 to buy a euro. Typically, in times of global duress, fund flows come into the U.S. for safety. However, we are not witnessing that “flight to safety” this time.

These moves have been tremendous and are indeed predicated on the president’s whims, making the near-term extremely unpredictable. No one ever knows how things will unfold. However, what Focused Wealth Management does know is that we’ve been through uncertain times before. Even though the reasons always vary, our job is to prepare for such events.

At the end of last year, we became more conservative in our portfolios. This enabled us to implement the same game plan that has proven effective through other crises. While each situation is different, they often trade similarly. I am very proud of my team and the implementation of your ongoing strategies.

We will continue to keep you abreast of our thinking and strategies on our weekly podcast, “2 Question Tuesday.” As always, please feel free to call or schedule an appointment if you have any needs or concerns.