Get Used to This

This is fear... The trade war escalates... Panic sets in... Take your medicine, Trump says... Add 'Tariff Tantrum' to a short list... Credit markets react... The bad and the good...

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Well, that escalated quick...

The past three trading days have turned what was a garden-variety "correction" for the benchmark S&P 500 Index – down 10% from its previous all-time high in February – into a bear market... at least based on intraday numbers rather than closing prices.

In the first 30 minutes of trading this morning, the S&P 500 was down another 4%, and 20% in total from its February 19 high. However, the index notably clawed back most of the latest losses to close the day down only 0.2%...

Still, as measured by the S&P 500, U.S. stocks have lost all their gains since the early part of 2024.

Fear has skyrocketed. Stocks (most stocks, anyway) have plummeted. Oil prices have plunged, a recessionary signal, and high-yield credit spreads are rising.

It's hard to chalk it all up to anything other than 'Liberation Day'...

President Donald Trump's announcement came after market hours on Wednesday – of a blanket 10% tariff on all U.S. imports and significantly higher rates on many other countries, intended to eat away at trade imbalances. After that, the S&P 500 dropped 10%-plus in two days for just the fourth time since 1952.

The other instances were October 1987 (with "Black Monday" – down 20.5% – being one of the days), November 2008 (the great financial crisis), and March 2020 (the start of the COVID-19 panic).

Add the "Tariff Tantrum" to this short list.

Trump says tariffs will generate hundreds of billions, if not a trillion dollars, in revenue for the U.S. "over the next short period of time," and boom the economy in the long run and stop the country from being ripped off in all these years.

I (Corey McLaughlin) don't doubt the stated intention, but in the meantime...

There are a few big questions to consider...

For example, what's the impact of these new tariffs on businesses like Apple (AAPL) and Nike (NKE), which are now confronted with a 54% higher cost on goods made in China than just a few months ago? And multiply that across various industries?

What's the knock-on effect on the labor market – if companies cut costs by laying people off? Or inflation, if they raise prices? Or both? And then what does that mean for the economy in the short, medium, and long term?

It wasn't the concept of tariffs themselves that roiled the market the past three trading days. Something had been expected for a while, even as high as 20% tariffs across the board in the days leading up to Liberation Day.

But the rates Trump announced – high double-digits on many nations, like a fresh 34% tariff on China – were higher than expected.

And just as the markets expected, that led to China matching tit for tat with a 34% import tax on U.S. goods... and yet more threats of escalation today.

I'm not saying the U.S. hasn't let too much industry go overseas over the decades. But in a span of 72 hours, businesses are now grappling with the idea of suddenly accounting for millions and billions of dollars in higher costs, and investors are wondering what that means for them.

And, today, nobody is sure whether these rates will hold or whether successful negotiations will be had with foreign nations... or when.

It makes for a whole lot of uncertainty, which you might want to get used to – for worse or better.

This is fear...

The CBOE Volatility Index ("VIX") is considered by some to be the market's "fear" gauge. In short, it measures implied volatility on the S&P 500, weighing the number and scale of bullish bets versus bearish bets for the next 30 days or so.

As our Director of Research Matt Weinschenk explained a few weeks ago...

It's often called the market's "fear index" because it's used to gauge investors' expected volatility.

I don't love the nickname – as it's not precisely what it measures – but it's a reasonable shorthand.

What the VIX really reflects is the cost of insuring against stock losses (i.e., the prices of options) over the next 30 days.

When the VIX is low, it means investors don't expect much volatility (so they aren't paying for the protection that options afford). When the VIX is high, investors are fearful of volatility (and options become more expensive).

The higher the number, the more "uncertainty" is in the air. On Friday, after China responded with retaliatory tariffs on all U.S. goods, the VIX spiked to 45... then finished around 48 today. That's the highest level since the COVID-19 panic and the great financial crisis (when the VIX hit 80)...

This is fear, as Stansberry Research senior analyst Brett Eversole wrote in an update to True Wealth subscribers on Friday...

The CNN Fear & Greed Index – which combines several indicators into a single sentiment reading – crashed to an "Extreme Fear" reading of 4 this morning. Meanwhile, the CBOE Volatility Index ("VIX"), well known as the market's "fear gauge," jumped to more than 40.

If you thought investors were showing signs of fear lately, you were wrong. This is what fear looks like.

This isn't totally unwarranted...

Remember, we're not even talking the impacts of these tariffs yet, but just the expectation around them. The fact that investors don't know what's coming day by day, hour by hour is causing extremely high levels of uncertainty.

Trump keeps saying he doesn't really care what the stock market is doing. But he also said in early 2024 that he didn't want to be Herbert Hoover, the last president to preside over a (disastrous) tariff war. One of those things will have to give, but it's not clear yet which one.

Credit markets are finally getting nervous...

For months, investors in corporate bonds have shown no signs of stress about the economy.

High-yield credit spreads, which measure the difference between the average yield of high-yield corporate bonds and similar-duration "risk free" U.S. Treasury bonds, were sitting at historical lows.

Not only were high-yield credit spreads well below their long-term average of 550 basis points, but they were also at the lowest level since 2007 (100 basis points equals one percentage point).

Low spreads indicate complacency from investors. It shows that they aren't requiring a much higher return for taking on risky junk bonds.

Our colleague and Stansberry's Credit Opportunities editor Mike DiBiase has called the credit market "clueless" to the risks the economy is facing.

As he wrote in last month's issue, the problems for the economy are starting to add up. From Mike...

A record number of folks are having to work at least two jobs just to survive. S&P reported that 8.9 million Americans now work more than one job, the most ever.

Considering consumers make up around 70% of the economy, the picture is bleak. Consumer sentiment is plunging. That can lead to a downward spiral.

But it's not just consumers that are struggling. As Mike highlighted, 50 more U.S. companies went bankrupt in February. And that's after corporate bankruptcies hit a 14-year high in 2024, according to S&P. More from Mike...

Consumer and business debt are at record levels. Much of this debt will not be repaid. Investors haven't woken up to this reality yet.

All of these factors should show up in wider high-yield credit spreads. That hasn't been the case just yet. But now, they're starting to show signs of waking up...

As of Friday, high-yield credit spreads sit at 445 basis points. That means the average high-yield, less creditworthy bond is yielding nearly 4.5 percentage points more than similar-duration Treasurys.

That's the highest level for credit spreads since a huge jump from the low of 259 basis points earlier this year, and it's up from 403 basis points on Thursday.

Now, spreads have hit the highest level since fall 2023. Back then, the market was shaking off the recession fears from the 2022 bear market and bank failures from spring 2023.

That's a sign that credit markets are now pricing in more risk among high-yield companies. They're catching on to the risks that Mike has highlighted. Still, they have a long way to go to reach their long-term average and crisis levels.

The level to watch...

In a private note this morning, Mike said he's still watching high-yield credit spreads closely. If spreads continue to rise and hold above their average of 550 basis points, that's a good clue for when the next credit crisis will happen, Mike says.

And once that happens, spreads could be headed much higher. As Mike explains in this week's episode of the Stansberry Investor Hour (available on our YouTube page here, on InvestorHour.com, or wherever you get your podcasts)...

When you see that spread get up to around 550, which is around its long-term average, and stay there – not just bounce there for a day or two and come back down – once it gets to that average and creeps up a little bit, that's when you should start getting really nervous, because the spread can go quickly to 1,000 basis points...

[In] the last financial crisis, it peaked at over 2,000 basis points. It can happen very quickly. If you look at the chart, it almost looks like a heart attack. When fear creeps in, the fear just breeds on itself, and banks start tightening lending, and then all of sudden, it's that downward spiral of fear, and things can get ugly very fast.

So, we'll keep a close eye on credit spreads.

Ultimately, what we're seeing now might not be the worst of it, as Mike and editor Bill McGilton shared in the December issue of Stansberry's Credit Opportunities, noting the threat of "twin peaks" inflation ahead and the consequences of it...

Here's the bright side: While this may spell trouble for the economy – with Mike and his team predicting two recessions before 2028 – it's a perfect time for bond investors. More from Mike...

If you understand credit cycles, you don't have to fear them. You can use them to make more money in safe, fixed-income investments than you ever thought possible. It's the best time to "back the truck up" for bond investors.

These are the times that Mike and Bill are preparing subscribers for in Stansberry's Credit Opportunities. Until then, the credit market has plenty of "waking up" to do to price in the risks the economy is facing.

So far, the White House is staying the course...

While flying back to Washington from Florida last night, Trump met with reporters on Air Force One. While he suggested he would be open to negotiate, he didn't back down from his plans, either. Of the stock market, he said...

I don't want anything to go down, but sometimes you have to take medicine to fix something...

Somebody also asked him if there was a threshold of "pain" in the stock market he was willing to endure, and Trump called that a "stupid" question...

What's going to happen with the market, I can't tell you. But I can tell you our country has gotten a lot stronger. Eventually, it'll be a country like no other. It will be the most dominant country economically in the world, which is what it should be.

He also said, "I don't think inflation's going to be a big deal." And today, Trump wrote on social media telling folks not to panic, then threatened more tariffs on China... starting on Wednesday. Trump posted to his social media account, in part...

If China does not withdraw its 34% increase above their already long term trading abuses by tomorrow, April 8th, 2025, the United States will impose ADDITIONAL Tariffs on China of 50%, effective April 9th. Additionally, all talks with China concerning their requested meetings with us will be terminated! Negotiations with other countries, which have also requested meetings, will begin taking place immediately. Thank you for your attention to this matter!

The bad and the good...

The way things have gone so far in 2025, if there is more escalation in this trade war, it's reasonable to expect more downside ahead for stocks. That said, several indicators are piling up that tend to coincide with significant market bottoms.

As Matt shared here recently about the VIX, for example...

In our experience, true market volatility begins when the VIX is around 30. When it rises above 40, it signals peak fear (and a potential buying opportunity).

Stansberry's Investment Advisory editor Whitney Tilson wrote in his free daily e-letter today that "the three previous [VIX] peaks in 2008, 2011, and 2020 were all fabulous long-term buying opportunities."

DailyWealth Trader editor Chris Igou wrote today about "what's possible once the chaos settles"...

He said that, since 1990, the S&P 500 has gained an average of 15% over the ensuing year after the VIX rises above 35 and then falls back below that level. That's compared with about an 8% average return in all years.

Ten Stock Trader editor Greg Diamond updated subscribers on his outlook today, saying of what could be a low... "This setup doesn't come around very often, so get ready to take advantage of it."

One indicator I like to watch for significant market bottoms is a collapse in "market breadth." One measure is the percentage of stocks below their 200-day moving average (200-DMA), or long-term technical trend.

Fewer than 20% of stocks trading above their 200-DMA has typically proved a good range for a substantial bottom. We saw that in 2022, 2020, 2018, 2015, 2011, and 2008 to 2009... though in the latter instance, the level dipped to less than 5% of stocks before the market turned higher.

We're at about 18% of stocks trading below their 200-DMA today.

So, deflated market breadth doesn't tell you a bottom is in – no one number can quite do that. But it does mean that a lot of risk might have been taken out of the market already.

Putting it all together, market 'fear' is no doubt high right now...

But remember, volatility and risk are part of the price of admission. Heed your stop losses – several of editors have sent alerts out over the past few trading days to close positions – to protect your portfolio from holdings that don't stop falling.

But also try to keep in mind that great buying opportunities occur when "everyone else" is scared. And that feels like the case today. I've heard about the stock market from a few people over the past few days that I literally never have before.

Seeing a run-of-the-mill S&P 500 fund down 10% in a few days and 20% in less than two months will understandably scare people. But if you've followed us for long, none of this should really surprise you. If you really want to invest for the long term, don't panic.

Trust in a diversified portfolio of high-quality stocks that will compound wealth. Own hard assets like gold. And have cash on hand.

Sure, maybe sell a position if you don't believe in it anymore or it has hit your stop-loss level. But you might find places to put new money to work soon, too.

New 52-week highs (as of 4/4/25): Alpha Architect 1-3 Month Box Fund (BOXX).

In today's mailbag, feedback on Dan Ferris' Friday Digest... and Trump's tariff rollout... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Dan, Thanks for the writeup Friday. You have been cautioning us about a correction for quite a while.

"While I am perhaps more diversified than most, I am still seeing a major impact to my portfolio. As a recent retiree, this is of course very concerning. If we are indeed entering a period of stagflation, the recovery will be long and painful.

"While others see preexisting economic conditions, I see the draw down as largely self-inflicted due to the unprecedented tariffs. It's funny how all of the other issues with the president seem to fade into the background when you are suddenly being made less well off because of ill-conceived economic decisions. Now it feels personal." – Subscriber John G.

"For someone who claims to be a business genius, he doesn't know how to introduce a new product. You first trial it in a small test market so you can see the reaction and make adjustments..." – Subscriber David S.

"In response to E.G.'s comments about the US having a trade deficit because of the size of our economy, he is right. But he does not address why it is just that our trading partners effectively block a huge amount of our trade in goods to them by ridiculously high import tariffs. If tariffs are to exist, why not have them equal as to particular products? For instance, why does the EU have such high tariffs on selected agricultural products? 'To protect our farmers,' which means penalizing US farmers. Tariffs in existence before Trump's announcements prevent the market from operating to allow winners and losers determined by price and quality." – Subscriber Robert B.

"Lost in all this tariff talk is an extremely important metric being left out. The U.S. Exports more SERVICES than it imports. Services like legal, accounting, engineering, lending, data storage, insurance and much more. The difference: In 2023 we exported just over 1 trillion in services while receiving around $750 billion. What if those countries affected by product tariffs decide to take their service business elsewhere?

"Regardless of your views on Trump, these extreme tariff policies are not well thought out or consider the larger picture. Anyone remember Herbert Hoover, who was elected on a platform of U.S. self-reliance? The Smoot-Hawley Tariffs were so extreme that they caused retaliation by our trading partners. U.S. exports dropped by 60% and exacerbated the Great Depression. The smart people who remember history are hoarding cash and buying gold." – Subscriber Darren N.

All the best,

Corey McLaughlin with Nick Koziol
Baltimore, Maryland
April 7, 2025