Risk-On, China Trade Deal, Soft vs Hard Economic Data
Photo Credit: Andrew Roberts, Unsplash
Weekly Market Recap for May 16th
This week, our US Risk Demand Indicator (USRDI) turned positive after turning negative and signaling risk off in March. The official reading is +0.01, slightly positive but enough to signal risk-on. As discussed below, the market has rebounded sharply off the April 8th lows as tensions eased. This indicator is built to identify longer-term cycles where the risk/reward is unattractive. Past risk-off signals have coincided with significant events, including the 2002 accounting scandals, 2008 financial crisis, 2011 U.S. debt ceiling, 2015–2016 industrial slowdown, late 2018 Fed tightening, 2020 COVID shock, and 2022 rate-hike selloff. This event has been unique regarding its global impact and unpredictability (tweets, news interviews, etc.). Given the fluid backdrop, the market could fluctuate between risk-on and risk-off in the coming months. We will remain data-driven as we track USRDI, asset class trends, and news headlines through month-end before adjusting ratings or portfolio allocations.
S&P 500 Index (Last 12 Months)
S&P 500 Technical Composite (Last 24 Months)
US Risk Demand Market Indicator
The US Risk Demand Indicator (USRDI) is a quantitative tool to measure real-time investor risk appetite. When the indicator is above zero, it signals a risk-on environment favoring cyclical sectors, high beta stocks, high-yield corporate bonds, and hybrid (convertible) bonds. In contrast, a reading below zero signals a risk-off environment favoring defensive sectors, low-volatility stocks, and U.S. Treasury bonds.
US Market Economic Cycle
The Market Cycle Indicator tracks two primary investor groups: macro investors and price-based investors. Macro investors rely on fundamental and economic data to guide their decisions, while price-based investors (or technical analysts) focus on price action, momentum, volume, and behavioral trends. The Indicator synthesizes these perspectives to identify the prevailing market regime.
S&P 500 Valuation Matrix
Key Takeaways
#1 - US-China Trade Deal
The big news this week was the U.S.-China trade deal. The two countries agreed to a 90-day pause in their trade war, easing tensions. As part of the agreement, the U.S. reduced tariffs on Chinese goods from 145% to 30%, while China cut tariffs on U.S. imports from 125% to 10%. Despite the pause, some tariffs remain in place, such as the U.S.’s pre-existing Section 301 and 232 tariffs.
Implication: The pause provided relief to global markets, boosting investor sentiment and triggering a cross-asset rally. The S&P 500 jumped +3%, oil prices rose as the economic outlook improved, and gold fell -1.5% as demand for safe-haven assets declined.
VIX Index Falls Below 20 After US-China Trade Deal
#2 - Overall Trade Deal Progress
The administration has agreed to multiple 90-day pauses to ease tensions and allow time for negotiations, but key protectionist policies remain. A 10% baseline tariff still applies to most imports, with additional aluminum, steel, and autos duties. The pauses are temporary and staggered: the suspension for most countries runs through July 8th, while the agreement with China extends through mid-August.
Implication: The pauses offer near-term relief to businesses and have eased market volatility, but unresolved structural issues could trigger renewed tensions once the pauses end.
#3 - Next Phase of the Trade War
The first phase, marked by de-escalation, is over. Tensions have eased significantly since early April, removing the worst-case scenario. Now, the market moves to the next phase of the trade war: assessing the impact on the economy and earnings.
Implication: The market will shift from reacting to headlines when analyzing the effects, which will not appear in the data for several months. Unfortunately, the data is likely to be noisy.
US Retail Sales Growth Slows After Tariff-Driven Surge
#4 - Measuring the Trade War’s Impact
One known measurable impact is that the US economic soft data has rapidly deteriorated. Survey-based indicators, which capture sentiment and expectations, have weakened significantly as policy uncertainty weighs on consumers and businesses. Meanwhile, hard data, which is lagging, shows no significant deterioration.
Implication: Sentiment can influence behavior, but hard data ultimately drives corporate earnings and economic growth. The question is whether today’s downbeat outlook will translate into fundamental changes in spending, hiring, and investment decisions.
US Industrial Production Holds Steady in April
#5 - Market Rally
The S&P 500 has gained +5% since March 31st and reclaimed its 200-day moving average. The Nasdaq 100 has staged a rebound that rivals the pace of its COVID-era recovery in March 2020. High-yield corporate credit spreads have erased their spike.
Implication: The market appears to discount the soft data and place a low probability on a growth slowdown.
S&P 500 Reclaims 200-Day Moving Average
Nasdaq 100 Rebound Matches COVID Rebound
High-Yield Credit Spreads Erase Liberation Day Spike
#6 - Ongoing Market Volatility Likely
Periods of weak soft data historically lead to higher volatility, negative EPS revisions, and below-average returns. Second, our U.S. Risk Demand Indicator (USRDI) is positive but sitting near 0. Negative readings are historically associated with increased market volatility.
Implication: Expect volatility to linger despite tensions easing.
Important Disclosures
This material is provided for general and educational purposes only and is not investment advice. Your investments should correspond to your financial needs, goals, and risk tolerance. Please consult an investment professional before making any investment or financial decisions or purchasing any financial, securities, or investment-related service or product, including any investment product or service described in these materials.
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