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The most important charts and themes in markets and investing…
1) What Happens When Volatility Increases?
A year ago during the tariff turmoil, the S&P 500 fell 12% over four trading days, its biggest plunge since March 2020 during the coronavirus crisis. At the same time, we saw one of the biggest volatility spikes ever, with $VIX closing above 50.
What happened since then?
The S&P 500 has rallied 38%, adding to the list of times one has to be greedy when others are fearful.
The $VIX’s closing high this year appears subdued compared to the 31 level on March 27.
While not as extreme as last year, this is still in the high 10% of historical $VIX readings.
What happened in the past after similar levels of volatility?
Above-average forward returns for the S&P 500 over the next 1-5 years.
Does that mean the S&P 500 will definitely be higher next year? No, there are no guarantees in the market, only probabilities. However, the higher the spike in the volatility index, the higher the chance of strong positive returns in the future.
2) Longest Correction Since 2022
At its low point on March 30, the S&P 500 was down 9.8% from its January peak. This is the biggest correction since the tariff turmoil last April and the longest (61 days) since the 2022 bear market.
The 7.3% decline in the first 60 trading days of the year was one of the worst starts to a year in history.
3) 2025 repeat?
But as we see in 2025, a bad start to the year doesn’t always mean a bad end.
The S&P 500 has rallied more than 7% from its March 30 low and is now down less than 1% on the year. At the same point in 2025, the S&P 500 fell 15% before staging an epic comeback to end the year up 18%.
What is driving the market higher?
There is hope for a resolution to the Iran war, with a 14-day ceasefire in effect. The 2.5% jump in today’s trading marked the 5th largest gain during President Trump’s second term.
What do the top 8 days have in common?
All of these events have been called “TACO” trade rallies, with the President’s sharp U-turn on Tariffs driving the largest increases in 2025 and a reversal of the Iran War driving increases in 2026.
4) Inflation Surge It’s Already Here
When will the war end and when will the Strait of Hormuz return to normal?
We don’t know the answers to these two questions, which makes estimating future inflation levels more difficult than usual.
The positive scenario: the ceasefire will hold and the war will end this month with the Strait of Hormuz returning to normal in May.
The negative scenario: the ceasefire is violated and the war escalates, with prices of Crude Oil and other commodities remaining high or continuing to soar high.
Regardless of what happens next, inflation is already rising. We will read the first report this Friday (4/10) with the March CPI report.
What do you expect to show?
The increase was 3.25% according to the Cleveland Fed, up from a 2.4% increase in February.
Gas prices in the US have now risen to $4.16 per gallon, the highest level since August 2022. The 40% increase over the past five weeks is the largest 5-week jump ever recorded.
Fertilizer prices rose 52% YoY to the highest level since May 2022. This is expected to increase food prices in the coming weeks/months.
5) No Chance of Interest Rate Cut in April
Higher inflation rates are expected to make the Fed hold back when it meets again on April 29. There is a 98% chance that the Fed does nothing (holding rates at 3.50-3.75%) and a 2% chance of raising rates (to 3.75%-4.00%). The longer inflation stays above 3%, the greater the pressure for the Fed to consider raising interest rates again.
And that’s all for this week. Thanks for reading!
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Disclaimer: All information provided is for educational purposes only and does not constitute investment, legal or tax advice, or an offer to buy or sell any security. Read our full disclosure here.
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