The sharp selloff across the market didn’t spare any sectors. At one point, every S&P 500 sector was trading below its 200-day moving average. The selling also led to capitulation-type signals across a variety of positioning, breadth, and momentum metrics. The chart below creates an indicator by looking at breath and momentum, including the portion of sub-industry groups at varying levels of drawdowns. The z-score of the indicator looks at how far it’s straying from the average, and is recently dropping below a value of 4. That’s an extreme move from the average, which historically has positive implications for forward returns.
Trump’s pivot on tariffs sparked a historic one-day rally across Wall Street. By some measures, the participation in Wednesday’s rally was historic as well. The ratio of advancing stocks relative to declining issues on the NYSE topped 37/1. That’s the highest level in at least over a decade. The volume in advancing stocks relative to declining issues hit a ratio of 72/1 (chart below). That’s the highest ratio ever back to at least 1980. The next six highest volume A/D readings saw the S&P 500 higher 3-, 6-, and 12-months out with stronger than average returns.
Volatility wasn’t just experienced in the stock market in recent weeks. Longer-dated bond yields are on the move as well. It might have been a jump in 10-year Treasury yields that spooked the White House and forced a pause on new tariffs. You can see in the chart below that that the 10-year yield jumped 49 basis points last week to 4.49%. That’s the largest weekly jump in yields in over 20 years. The market for Treasury securities stands at $29 trillion market, and volatility can have knock-on effects to other sectors.
Following a post-election rally that took the U.S. Dollar Index (DXY) to the highest level since late 2022, recent losses are accelerating and testing a key support zone. After peaking in mid-January, DXY has dropped 9%. The pullback has accelerated since the start of April as tariff developments intensified and the economic growth outlook is called into question. DXY is now taking out a key support level near 100, which has major implications for commodities priced in U.S. dollars as well as international equities where a weaker dollar boosts the returns earned on international stocks by U.S. investors.
As tariff uncertainty ramped up, the S&P 500 posted a 2-day decline of 10%+ for just the eighth time in the past century. That’s the equivalent of entering correction territory in just two days. The chart below plots the subsequent move in the S&P 500 during the next 12 months following a 2-day 10% decline. You can see that price action is generally choppy, especially over the next couple months. That includes several back tests of the initial low made on the pullback.
On an intraday basis, the S&P 500 fell by over 20% from its peak on February 19. The longer-term recovery from the selloff will come down to the economic outlook and if the earnings picture remains intact. That means avoiding the recession scenario if the the magnitude and duration of the stock market decline will be shorter-lived. The chart below shows the S&P 500’s past bear market drawdowns sorted by depth and duration. The orange dots are when bear markets are driven by recession, which tend to be more drawn out across time and have lower drawdowns.
