Weekly Investment Update (04/11/2025)

As expected, the stock market was whipsawed this week by ongoing trade-related headlines. On Wednesday afternoon, President Trump announced a reduction of reciprocal tariff rates to a 10% baseline for the 60 countries with higher tariffs, excluding China. The newly introduced 90-day pause will allow time for individual country negotiations, and stocks surged on the news. The move higher was dramatic, but not unprecedented: the 9.5% daily increase in the S&P 500 was the 10th best day in history — excluding two days during the Global Financial Crisis, one must go back to the Great Depression era to find a larger increase. Interestingly, 491 of the 500 S&P 500 stocks were higher on the day. Historically, when the S&P had that many or more net advancing stocks in a single day, it was higher one year later with an average return of 20% —most recently in 2022.

A recognition that the Trump administration is not operating with ideological blinders on relative to trade will serve as an ongoing support to markets, in our view. Furthermore, the lower-than-expected March inflation print gives the Federal Reserve some breathing room to cut rates should market and economic disruptions persist. That said, we believe trade-related volatility will continue. Although the 10% baseline tariff now feels modest given the starting point, it still represents a material increase in the average U.S. tariff rate. For companies, this equates to a meaningful tax increase that could weigh on growth.

All things considered, a recession is not inevitable, and S&P 500 earnings can still grow in 2025. Going forward, we will be paying very close attention to the details of the forthcoming tax proposals — where offsetting cuts may be introduced — as well as signs that tariff rates will be reduced further throughout the 90-day negotiation period. We are not materially reducing risk exposure in our portfolios and have been using volatility to add to high-conviction names as well as establish new positions at more attractive valuations.

Volatility Persists as Global Markets React to Trade Policy Uncertainty

What is happening: Global markets have been enduring increased volatility due to ongoing uncertainty surrounding U.S trade policy. Since the start of the year, the Chicago Board of Exchange Volatility Index (VIX), commonly referred to as Wall Street’s fear gauge, has swung from a low of 14.8 on February 14 to an intraday high of 60.1 on April 7. For context, other occasions when the VIX closed above 50 were during the global financial crisis and the COVID pandemic selloff. On April 9, when the U.S. levied reciprocal tariffs on all trading partners of 10 times the end-2024 tariff rate, the VIX rose above 50, and the S&P 500 and MSCI World ex-U.S. indices fell 19% and 12% from their February peaks, respectively. Bonds haven’t been immune, as 10-year U.S. Treasury prices fell with yields rising to 4.5%, partially attributable to concerns over declining demand, a loss of confidence in U.S. creditworthiness, and rising inflation expectations.

On Wednesday, the Trump administration paused the reciprocal tariffs for 90 days, leaving 10% tariffs across the board while increasing the tariffs on China to 145%. Consequently, investor fears abated with the VIX closing around 34 and markets rebounding with the S&P 500 returning 9% for the day.

Why it matters: Despite the 90-day hold on Trump’s reciprocal tariffs and the likelihood that negotiations will generate improved outcomes, the tariffs that remain — 10% universal tariffs, sectoral tariffs on autos and automotive parts, and a behemoth 145% tariff on Chinese imports — are substantial and have the potential to dampen economic growth. Prior to the tariffs, S&P 500 earnings were projected to grow 11%, a testament to strong fundamentals, but if upheld, tariffs could reduce that growth to mid- to high-single digits. Alternatively, the tariffs could become too onerous and result in a bear market — a sustained decline of 20% or more. However, all bear markets are not equal. Event-driven bear markets, triggered by a unique exogenous shock, on average, tend to have a relatively shorter duration of approximately eight months followed by a year of recovery. Conversely, cyclical bear markets that are caused by economic cycles tend to last, on average, two years with an ensuing recovery of around five years. Ultimately, outcomes of ongoing trade negotiations and retaliatory actions, in addition to eventual fiscal and monetary policies, will influence the fate of financial markets.

Uncertainty around U.S. trade and fiscal policies is likely to continue throughout the balance of the year, leading to structurally higher market volatility. Historically, the S&P 500 has had a drawdown of 14% during any given year, while calendar-year returns have been about 10%. Faced with short-term volatility, it’s important to focus on the long term. In addition, maintaining a diversified portfolio across asset classes, investment styles, market capitalization, regions, and sectors helps counterbalance losses and optimizes returns for a given level of risk. Within Bessemer’s equity strategy, earlier this year, allocations were adjusted to narrow our overweight to U.S. equities and to deepen our underweight to China. During this elevated period of stress, we are investing in high-quality stocks and bonds that are better positioned to weather uncertainty while avoiding those exhibiting weaker financial conditions and limited growth opportunities. Our fixed income portfolios continue to invest in stronger-quality bonds with a higher-than-normal duration.

Inflation Continues to Moderate While Tariff Impacts Pose Future Risks

What is happening: The March CPI report came in well below consensus expectations, with the headline figure easing to 2.4% year-over-year in March, from 2.8% in February, and the core rate, which excludes volatile food and energy prices, moderating to 2.8% year-over-year, down from 3.1% the prior month. Notably, the March report marked the smallest yearly increase in core CPI inflation since the beginning of 2021. The deceleration was primarily driven by sharp declines in core services inflation categories, such as airline and hotel prices, which offset a rise in rental costs.

While falling hotel prices helped ease overall shelter inflation, the rent component remains stubbornly high, continuing to lag real-time market prices. Rental prices are inherently sticky, only changing when leases are renewed or tenants move, creating a disconnect between real-time and CPI-measured rental prices. Given that current market prices are continuing to run at roughly their pre-pandemic rate, we expect further disinflation in CPI rental prices in the months ahead.

Why it matters: Absent the overhang of ongoing tariff negotiations, the March CPI report would be a promising sign that inflation remains on a downward trend, with little evidence that President Trump’s initial February and March tariff rates materially impacted prices. However, even if the April tariff hikes are negotiated meaningfully lower during the next 90 days, we will likely still see upward price pressure in the coming months, specifically in core goods inflation, which is more exposed to Chinese imports. Notably, the steep declines in airline and hotel prices likely reflect a pullback in consumer discretionary spending, potentially signaling an early slowdown in consumption.

While uncertainty persists, the slowing inflation trend allows the Fed to maintain policy flexibility amid tariff headwinds. Although the University of Michigan’s one-year inflation expectations reached their highest level since 1981, longer-term inflation expectations remain subdued, which is likely what the Fed will anchor to. At this juncture, we believe the risks to growth are more prevalent than the risk of an inflationary surge. While the pass-through effects of tariffs could be seen in prices during the middle of this year, heightened uncertainty may put downward pressure on consumption, with softer growth alleviating some of the upward price pressure.

Bessemer portfolios have become more defensive since the start of the year and are currently underweight the consumer discretionary sector, a segment particularly vulnerable to higher tariff rates on Chinese goods.