By Teresa Rivas

Any investor who went into a month-long hibernation on April 1 would have slept through some of the most tumultuous trading days in recent history, only to awaken to a stock market that had barely budged.

The S&P 500 ended April with its largest seven-day percentage gain since 2020, leaving it down less than 1% for the month. That has given plenty of investors whiplash and a general skepticism about the market's recovery.

That is fair. Whether the current upswing represents a bull- or bear- market rally, if the April 2 shock tariff announcement has shown anything, it is that the market can turn on the dime at the whim of President Donald Trump, who relishes big, splashy moves. That is enough constant background uncertainty to make anyone nervous.

Yet at least for now, much of the current rally does seem justified precisely because the White House has so swiftly and nearly completely backtracked from the ultraprotectionist stance it rolled out at the start of April. The potential economic pain of tariffs has been significantly diminished, though not eliminated. There are hopes that the 145% China tariffs will be negotiated away, as will those on other nations, even if the current 90-day extension has to be extended into 180 days or longer.

More important, argues Deutsche Bank macro strategist Henry Allen, is the fact that for all the fears of a recession, one doesn't seem to be materializing. The swift market rebound means we'll largely avoid the negative consequences of the wealth effect -- consumers tightening their purse strings as their portfolio values shrink -- and tighter financial conditions that would crimp business expansion.

The hard numbers have held up remarkably well, both globally and within the U.S. Readings in areas such as payrolls, unemployment, PMI, and ISM data are lower, but still point to a growing economy. And lower oil prices will somewhat help to offset the inflationary effects of tariffs.

The bottom line is that while this is a particularly and understandably "unloved" rally, "there are several examples from recent history where unloved rallies carried on for some time" Allen wrote on Tuesday.

The same happened in 2020 after the initial pandemic plunge. "Despite widespread fears that it would be a dead cat bounce, risk assets recovered very strongly, with the S&P 500 back at an all-time high by August," he said in a research note. "Another example came in 2023-2024, as the lags from tighter monetary policy were still being felt across the economy and fears of a US recession were widespread. There was plenty of skepticism at that rally, yet the S&P 500 posted back-to-back annual gains above 20% for the first time since the late-1990s."

DataTrek co-founder Nicholas Colas is of a similar opinion. When it comes to the recent rally, there has been legitimate relief, he wrote Tuesday.

"The administration's trade policy pivot quickly changed the investment landscape, and in ways that were not possible in [previous selloffs of] March 2020 or June 2022, when unpredictable forces were driving macro uncertainty," he said. "On the other hand, we still don't have any trade agreements in hand and nor do we know how ongoing uncertainty will affect the US economy."

He noted that moves so big and quick are rare in recent history, so there aren't many examples from which to draw conclusions. And since this is a unique situation largely dependent on unfolding trade policy, investors should really make their decisions based on what they will think will happen on that front alone.

"This outsized recovery off the lows means markets expect a much calmer and more predictable path for both trade negotiations and US economic growth in the months ahead," concluded Colas. "If you agree with that assessment, then staying long makes sense. If you do not, then it is time to take some risk off the table. Our own view is that there are enough reasons to stay optimistic for now, but we will want to see some positive news flow on trade in the coming week or two."

We'd all like to see that.

Write to Teresa Rivas at teresa.rivas@barrons.com

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May 06, 2025 15:59 ET (19:59 GMT)

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