Bear Market Brink to Policy Pivot

The Week Ahead - April 13, 2025

The correction in markets over the past six weeks has come with a bout of volatility we have not seen since the depths of the pandemic. This difference today is that the situation is completely in our control. Last week, the S&P 500 barely escaped a 20% bear market decline, as investors continued to fret about the possibility of a global recession instigated by President Trump’s trade policies. During this time, I assumed that stock prices would continue to fall until they forced a change in policy from the Trump administration. The question was always how low must they go to force that change. We found out last Wednesday when the implementation of the president’s reciprocal tariff program was delayed for 90 days. This news sent the major market indexes soaring with the S&P 500 rallying 9% on the day, while the Nasdaq Composite had its second best day ever up 12%.

Yet it wasn’t falling stock prices that provoked this change as much as the spike in bond yields combined with a rapidly weakening US dollar. The 10-year Treasury yield soared from 3.87% on Monday to 4.59% in its largest one-week increase since 2001. This yield dictates borrowing costs for consumers, and its sharp increase runs counter to one of the primary objectives of the administration, which is to lower borrowing costs. Perhaps more worrisome to Treasury Secretary Scott Bessent was that yields were rising in concert with a weakening US dollar and cascading stock prices, raising fears of capital flight as investors around the world divested US assets. The increase in yield also makes the burden of financing our growing federal debt and deficits more expensive. The bond market demanded a pivot, and it got one.