Market Commentary: What Just Happened?
By Brian Andrew, CFA® – Chief Investment Officer
On April 2nd, the Trump Administration announced their tariff plan to the chagrin of markets. It all boils down to the effective tariff rate paid in the U.S. This rate has been near 2% for 5 decades. With the announcement, it was clear that it could rise above 20%. Market turmoil ensued as stocks sold off, and initially, interest rates fell quickly. However, on April 8/9th, it appeared global bond markets were having some trouble, and the April 2nd tariffs, which were to go into effect on the 9th, were paused, except for China.
After declining over 15% in volatile trading, stocks rallied on this pause news, and bond yields shot up. Let’s dig into what to make of it all and provide some insights about the future for markets.
Stocks
Stocks sold off sharply, marking the steepest weekly decline since the early days of the pandemic. At their lows, the S&P 500 fell 9%, the NASDAQ dropped 9.7%, and the Russell 2000 declined 9.3%. All sectors ended the week in negative territory, though defensive areas like Utilities, Consumer Staples, and Health Care outperformed relative to cyclical sectors such as Financials, Energy, and Industrials.
In response to the suspension news on April 9th, equity markets rebounded sharply, registering their largest single-day gains since 2008. The S&P 500 ended the day up 9.61%. Uncertainty around policy, China’s retaliatory tariffs, and still elevated overall tariff rates are driving market volatility; stocks fell again on the 10th. The S&P 500 Index was down 3.5%.
Investor uncertainty surged during this period, as the VIX Volatility Index chart below shows (a measure of stock price volatility) spiked to 52 on April 8th, its highest level since April 2020.
Source: Trading Economics 4.10.25
The spike reflects the uncertainty from tariff policy confusion and its ripple effects, including impacts on consumer spending, inflation, corporate earnings, and employment. We believe the VIX could remain elevated even with the tariff pause as investors attempt to gauge the next steps for policy and the potential for tariffs to resume at the end of the 90-day pause period.
Outlook and Positioning
Stock market sectors with more reasonable valuations show greater resilience than growth-heavy names like the Magnificent Seven, highlighting the benefit of diversification in the current environment.
We will continue to emphasize our quality bias withholdings, as they have historically performed well in downturns due to their disciplined valuation-oriented approach and emphasis on strong business models.
As seen by the historic rally on April 9th, trying to time a market like this is not a good strategy. Remaining invested is crucial, as missing out on the best-performing days of the stock market can significantly dampen long-term returns. We saw this last week when the tariff policy pause was announced, and markets rallied 9-13%.
Source: Goldman Sachs Asset Management
Alternative Investments
While public markets for stocks and bonds have been volatile, private credit, real estate, and infrastructure tend to be more insulated from daily market swings due to their less liquid investment structures and long-term horizons. These assets may also provide inflation protection through mechanisms like floating rate debt, contractual rent increases, and CPI-linked (Consumer Price Index, a measure of inflation) revenue streams in infrastructure. Additionally, gold may serve as a reliable hedge against inflationary pressures.
More liquid alternatives, such as hedge funds employing managed futures or equity market-neutral strategies, provide diversification with a low correlation to the stock market. Historically, these strategies have delivered strong relative performance during geopolitical macro shocks, potentially helping to smooth portfolio drawdowns and minimize volatility.
Private equity secondaries are poised for tailwinds as liquidity-constrained LPs seek exit options amidst valuation uncertainty and reduced exit activity. Deal flow in this space is expected to rise, potentially at more attractive pricing.
Structured products such as market-linked income notes benefit from current market conditions, as heightened volatility and rising interest rates can enhance their risk-return profiles. These features are directly tied to the pricing structure (derivates + zero coupon bond), creating tailwinds for these strategies in uncertain market environments.
Conversely, event-driven hedge funds and traditional private equity may face headwinds. The tariff-induced slowdown is expected to suppress M&A volumes, dampening key value-creation levers in these strategies.
As public markets react swiftly to geopolitical and policy headlines, alternative investments can offer a strategic ballast—providing both downside protection and long-term return potential in an increasingly uncertain macroeconomic landscape.
Bond Markets
Since the tariff announcement, fixed-income markets have also experienced a notable increase in volatility, as reflected by the MOVE Index rising to its year-to-date high. The initial reaction was a classic flight to quality (investors pour into Treasury bonds, pushing yields lower and prices higher), with Treasury yields falling across the curve, led by the 2-7 year maturities. The 10-year yield closed below 4% for the first time since October 2024 before settling around 4.30%.
This rally underscores a renewed decoupling between equities and fixed income, with bonds delivering diversification and downside protection. Outside of high yield, most fixed-income areas have delivered attractive year-to-date returns, offering critical support to traditional 60/40 portfolios.
In segments of the bond market, we’ve observed a clear rotation up in quality. Investment-grade corporate bonds have outperformed their high-yield counterparts, though the widening in yield spreads has remained orderly. Having moved wider, yield spreads are now nearer their historical averages, and while they remain supported by resilient credit fundamentals, they may face continued pressure from policy uncertainty.
Mortgage-backed securities (MBS) have been the standout performer among other sectors. Their combination of higher quality and attractive yields makes them particularly compelling in the current environment—and we believe this outperformance will likely continue.
Looking ahead, with volatility expected to remain elevated, we see a great environment for active managers to generate alpha. We believe it may be prudent to moderate portfolio risk by reducing bond portfolios’ interest rate sensitivity and rotating into higher-quality sectors that offer more stability in the face of continued macro uncertainty.
We will continue to monitor markets and our positions carefully. We approach the current environment cautiously, knowing that there is still tremendous uncertainty. However, the tariff pause may provide time for countries to negotiate deals, and news flow will move markets. Volatility can create opportunity so we’ll be looking for those proactively.
For any additional questions reach out to your Merit financial advisor.
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