Hey everyone, Hedgie here! 👋 Welcome to this week's market breakdown. I'm going to walk you through everything that happened in the markets this week and explain what it means for regular investors like you. This was a week of relief as trade tensions eased and markets staged a significant rebound after weeks of volatility.

All three major indices finished the week higher, with the S&P 500 up 4.6%, the Dow up 2.5%, and the Nasdaq surging 6.7%. As of Sunday evening when this newsletter was prepared, stock futures were pointing to a negative open on Monday (S&P 500 futures -0.50%, Nasdaq futures -0.66%, Dow futures -0.37%) as traders prepare for a busy week of tech earnings and economic data.

Note: This newsletter was prepared on Sunday evening for Monday morning release. Market conditions may have changed by the time you're reading this.

This week we saw several key developments that point to the peak in trade uncertainty and market volatility being behind us:

Following initial concerns that the historically high tariff rates announced on April 2 would persist, there have been a series of positive developments showing that the U.S. administration is softening its stance on trade. The 90-day pause on the new tariffs was a significant first step, but the tit-for-tat tariff hikes with China would still result in the average rate on imported goods jumping to more than 20% from around 2.5% last year.

However, media reports mentioned last week that the administration is considering cutting its tariffs on Chinese imports in an effort to de-escalate tensions. And China is said to be considering exempting some U.S. goods from tariffs as costs increase. Separately, Treasury Secretary Bessent said that the U.S.-South Korea bilateral trade discussions were "very successful" and may result in an agreement soon, while also mentioning that the U.S. is making "significant progress" toward a trade deal with India.

As the last couple of weeks showcase, the narrative and headlines on trade can change faster than the weather changes in springtime. Until an actual deal with a major country is made, uncertainty will linger, but with the U.S. administration looking for a path to reduce tariffs, the peak in trade uncertainty and market volatility may be behind us.

After expressing his frustration that the Fed hasn't moved to lower interest rates further, President Trump said last week that he has "no intention of firing" Fed Chair Powell. The threats to the Fed independence, the bedrock of a credible monetary policy, was a contributing factor to the brief rise in Treasury yields. With these worries fading, the 10-year yield has now returned back to near the middle of the 4.0%-4.5% range that many analysts expect to persist this year.

The bond market is now pricing in three rate cuts in 2025, as economic growth is expected to slow but not fall into a recession. The Fed currently remains in wait-and-see mode and may stay on pause when it meets again on May 7. But by June or July, policymakers will likely have more clarity on the impact of tariffs. Signs that growth and the labor market will be cooling will likely lead the Fed to cut rates two-to-three times this year.

The NASDAQ's weekly outperformance relative to other major U.S. indexes stemmed from strong quarterly results from major technology companies and the tech sector's overall strength during the week. Tech stocks in the S&P 500 surged nearly 8% on average for the week; in contrast, the consumer staples sector was down more than 1%.

The earnings growth rate for S&P 500 companies improved as earnings season entered its busiest period. First-quarter net income was expected to rise an average of 10.1% over last year's first quarter, based on reports already released as of Friday and analyst forecasts for companies that haven't yet reported, according to FactSet. A week earlier, the projected earnings growth rate was 7.0%.

According to data from FactSet, 73% of the companies that had reported first-quarter results through Friday morning had beaten consensus earnings expectations. This strong performance helped drive the market rebound, particularly in the technology sector.

Prices of U.S. government bonds climbed, sending yields lower, amid an easing of recent volatility across the fixed-income market. The yield of the 10-year U.S. Treasury note closed around 4.26% on Friday, down from a recent intraday high of 4.59% on April 11. Yields for longer-dated Treasuries posted similar declines, with the 30-year bond finishing around 4.72%.

This stabilization in the bond market is a welcome sign for investors who had been rattled by the sharp rise in yields earlier this month. Lower yields are generally positive for stocks, particularly growth stocks like those in the technology sector, which helps explain the NASDAQ's strong performance this week.

While domestic stocks have narrowed their losses, international stocks continue to lead in year-to-date performance. The MSCI EAFE Index, which tracks developed markets outside the U.S. and Canada, rose 2.9% for the week and is now up 10.1% for the year. This outperformance highlights the importance of global diversification in investment portfolios.

European markets were particularly strong, with Germany's DAX climbing 4.89%, France's CAC 40 gaining 3.44%, and Italy's FTSE MIB adding 3.80%. The UK's FTSE 100 rose a more modest 1.69%.

Despite the market rebound, there are still some concerning economic signals:

S&P Global reported its Flash Purchasing Managers' Index (PMI) survey data for April, which indicated that U.S. business activity growth slowed to the lowest level in 16 months. While activity in the manufacturing space unexpectedly increased, from 50.2 in March to 50.7 in April, services activity growth slowed sharply, dragging the overall index down to 51.2 from 53.5 in the prior month (readings above 50 indicate expansion, while readings below 50 signal contraction).

Prices charged for goods and services increased at the fastest rate in over a year, with much of the increase attributed to the impact of tariffs. Expectations for the year fell to the lowest level since July 2022, although the decline in optimism was less pronounced in the manufacturing sector amid hopes of positive impacts from government policies.

On Thursday, the National Association of Realtors (NAR) reported that sales of previously owned U.S. homes dropped 5.9% in March, the steepest monthly drop since November 2022. The 4.02 million seasonally adjusted home sales during the month were also the lowest for March since 2009. According to Lawrence Yun, NAR Chief Economist, "home buying and selling remained sluggish in March due to the affordability challenges associated with high mortgage rates."

This housing slowdown is a significant economic warning sign, as housing activity often leads broader economic trends. When fewer people are buying homes, it affects everything from furniture sales to construction jobs to mortgage lending.

A monthly gauge of U.S. consumer sentiment extended its steep year-to-date decline as it fell for the fourth month in a row. The University of Michigan said that its final reading for April was 52.2, down from 57.0 in March, as survey participants cited concerns about higher tariffs and inflationary pressures. At year-end 2024, the index was at 74.0.

Even more concerning, expectations for inflation in the year ahead surged to 6.5%, up from 5% in March and the highest reading since 1981. This jump in inflation expectations could make the Fed's job more difficult, as consumer expectations can become self-fulfilling if people begin to demand higher wages or rush to purchase goods before prices rise further.

The International Monetary Fund scaled back its forecasts for global economic growth, citing risks related to higher tariffs. The organization is now projecting a 2.8% annual GDP growth rate in 2025 and 3.0% in 2026. Three months ago, prior to the recent escalation in tariffs, the fund had forecast 3.3% growth rates in both 2025 and 2026.

This downgrade reflects the real economic impact of trade tensions, even as financial markets have begun to recover on hopes of de-escalation.

These market forces have several practical implications for regular investors:

If you're just starting your investing journey, this market volatility actually presents some good opportunities. Many quality companies got beaten down during the recent panic, creating some attractive entry points. Don't try to time the bottom perfectly. Nobody can do that consistently. Instead, keep adding money regularly to your investments (what the pros call dollar-cost averaging) and don't freak out about short-term swings. Also, take a serious look at international markets right now. They've been outperforming the U.S. this year and could help balance out your portfolio.

For those of you in the middle of your career, now's a good time to check if your investment mix still makes sense. The recent market swings might have thrown your target allocations out of whack. With bonds stabilizing, it's worth reviewing your fixed income holdings. They might have taken a hit when yields spiked earlier this month. And again, if you're heavily concentrated in U.S. stocks (especially tech), consider adding some international exposure. The outperformance of markets like Germany (up 4.89% this week alone) shows why global diversification matters.

For my retired readers or those nearing retirement, the steepening yield curve actually offers some interesting income opportunities. With the 10-year/30-year spread widening to 46 basis points, you can get better yields by extending duration a bit. A bond ladder (buying bonds that mature at different times) can help you capture these higher rates while still maintaining flexibility. And please make sure you have enough cash set aside for near-term expenses. The last thing you want is to be forced to sell investments during market downturns to cover your living costs.

The bond market deserves special attention this week because of the significant stabilization we've seen after the recent volatility. The 10-year Treasury yield closing around 4.26%, down from a recent high of 4.59%, represents a meaningful decline that has positive implications across financial markets.

What's causing this stabilization? Several factors appear to be at play:

For regular investors, these bond market dynamics have real impacts:

The yield curve has also steepened, with the spread between 2-year and 10-year yields widening to 50 basis points and the 10-year/30-year spread expanding to 46 basis points. This steepening typically reflects expectations for stronger economic growth and inflation in the longer term, even as short-term rates may decline due to Fed rate cuts.

The market is gearing up for another crucial week with several key events to monitor:

The market rebound this week shows that investors are becoming more comfortable with the trade situation, particularly as the administration appears to be softening its stance. However, it's important to remember that we're not out of the woods yet. Until actual trade deals are announced, uncertainty will linger, and markets could remain volatile.

The upcoming GDP report will be particularly important in assessing the health of the U.S. economy. A weaker-than-expected reading could raise concerns about a potential recession, while a stronger-than-expected number would provide reassurance that the economy remains resilient despite the trade headwinds.

What makes this situation challenging is the mix of positive and negative signals we're receiving:

For long-term investors, remember that markets eventually find equilibrium. These kinds of storms have happened before and will happen again. The financial system is resilient over time, even if the ride gets bumpy for a while.

The best approach during times like these is to:

In times like these, the wisest hedgehogs don't panic, they prepare. Build your financial burrow with diverse materials, keep some extra acorns in reserve, and remember that even the harshest economic winters eventually give way to spring.

That’s a lot of writing, but I hope it was helpful! If you haven't followed me on X, you can find the link below where I'll be updating you daily on what is happening in the financial world. Thank you for reading!

Hedgie

DISCLAIMER: For educational purposes only. I'm a hedgehog who types with tiny paws, not a licensed financial advisor (my only certifications are in "Burrow Construction" and "Quill Maintenance"). Investments involve risk, sometimes as prickly as my back. Do your own research or consult with a human financial professional, as taking investment advice from woodland creatures, no matter how financially literate, is generally not recommended by the SEC.