Start, stop, start, stop tariffs = whiplash.. Experiencing a pain in the neck? Well aside from the usual suspects (dog, spouse, neighbor), it could simply be that you’re a market watcher. From April into May, President Trump’s off-again, on-again tariff policy has caused whiplash in stock markets worldwide. Eight hundred point swings in the Dow have become commonplace with every tariff tweet and walk-back.
In the span of a week, Trump says he’ll hit EU goods with a 50% tariff. Traders braced for impact—only to watch Trump walk it back days later following a charm offensive with European Commission President Ursula von der Leyen. Cue a broad-based rally. Then a federal court strikes down many of his import taxes, ruling that he didn’t have the power to levy them. And then, just hours later, another court puts that ruling on hold, letting the tariffs continue - for now.
In the span of a week, Trump says he’ll hit EU goods with a 50% tariff. Traders braced for impact—only to watch Trump walk it back days later following a charm offensive with European Commission President Ursula von der Leyen. Cue a broad-based rally. Then a federal court strikes down many of his import taxes, ruling that he didn’t have the power to levy them. And then, just hours later, another court puts that ruling on hold, letting the tariffs continue - for now.
Taking a step back, though, May is looking like a banner month for stocks. Unfortunately, that’s simply the market clawing back from a correction in April. When all is said and done, the S&P 500 is back at the waterline for the year. Much sound and fury for the first five months of 2025, zero return.
TACO Trade
The "TACO trade," short for "Trump always chickens out," was coined by Financial Times columnist Robert Armstrong but has since spread across Wall Street and the internet. The idea is simple: Trump floats aggressive new levies, markets panic, and then he backs down - triggering a rally. Rinse and repeat.
Investors engage in the "TACO trade" by buying stocks at lower costs after Trump announces new tariffs or increases them, then reap the benefits when the markets rebound as he delays or backs off of them.
But strategists aren’t buying the dip-buying narrative just yet. “Forecasting has become extremely difficult due to the day-to-day shifts in tariff policy,” said Anthony Saglimbene at Ameriprise. “Policy risk is now the dominant theme. And that demands a higher risk premium.”
Translation: stocks may be high, but the margin for error is thin.
A Hit to Earnings
Corporate America is taking notice. Year-end earnings forecasts for the S&P 500 have dropped to 8.4% growth for 2025—down from 12.1% last year and well below the 14% projection made in January. Several large firms have begun pausing or delaying projects, citing “macro uncertainty” (read: tariff roulette).
Even tech, which led the Q1 rebound, is wobbling. The AI spending that juiced 2023–24 earnings is showing signs of fatigue.
The Fed: Caught in the Middle
Meanwhile, the Federal Reserve is watching it all from the sidelines—rate cuts on hold, inflation still a little too warm for comfort. April’s CPI came in at 2.3%, above the Fed’s 2.0% target, dashing hopes for a summer rate cut.
Powell has made it clear: the Fed is in wait-and-see mode. That’s a tough spot. If tariffs stick and inflation climbs, the Fed tightens. If growth falters, the Fed eases—but not if inflation is still a problem. The balancing act continues.
Going Forward
Based on the median forecast of 51 equity strategists, analysts, brokers and portfolio managers collected May 15-28 by Reuters, the year-end target for the benchmark S&P 500 is 5,900 – roughly where it is today, That’s a sharp downshift from earlier projections of 6,500 and reflects a broad consensus: the market’s run may be running out of road unless trade chaos clears.
Not surprisingly, Tom Lee, chief investment officer of Fundstrat Capital, sees more upside. While he calls the May rebound one of the “most hated” rallies, he notes that investors flip bullish as soon as the market makes an all-time high. The S&P 500 is now just about 3% shy of that mark. According to Lee, that’s close enough to trigger a sentiment shift. “The market is climbing a wall of worry. And that’s bullish.”
Final thought: May gave us a rally no one seems to trust, an economic backdrop no one can predict, and a Fed with its hands tied. If you’re feeling both optimistic and queasy, you’re not alone.
I remain invested. But hedged.
And For What It’s Worth…
As reported in The Week magazine, Dutch scientists concluded that the universe will die “much sooner than expected,” with all stars set to burn out in 10 to the power of 78 years – that’s one with 78 zeros – rather than the previous estimate of 10 to the power of 1,100 years.
Let’s make the most of it.
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
--David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.
TACO Trade
The "TACO trade," short for "Trump always chickens out," was coined by Financial Times columnist Robert Armstrong but has since spread across Wall Street and the internet. The idea is simple: Trump floats aggressive new levies, markets panic, and then he backs down - triggering a rally. Rinse and repeat.
Investors engage in the "TACO trade" by buying stocks at lower costs after Trump announces new tariffs or increases them, then reap the benefits when the markets rebound as he delays or backs off of them.
But strategists aren’t buying the dip-buying narrative just yet. “Forecasting has become extremely difficult due to the day-to-day shifts in tariff policy,” said Anthony Saglimbene at Ameriprise. “Policy risk is now the dominant theme. And that demands a higher risk premium.”
Translation: stocks may be high, but the margin for error is thin.
A Hit to Earnings
Corporate America is taking notice. Year-end earnings forecasts for the S&P 500 have dropped to 8.4% growth for 2025—down from 12.1% last year and well below the 14% projection made in January. Several large firms have begun pausing or delaying projects, citing “macro uncertainty” (read: tariff roulette).
Even tech, which led the Q1 rebound, is wobbling. The AI spending that juiced 2023–24 earnings is showing signs of fatigue.
The Fed: Caught in the Middle
Meanwhile, the Federal Reserve is watching it all from the sidelines—rate cuts on hold, inflation still a little too warm for comfort. April’s CPI came in at 2.3%, above the Fed’s 2.0% target, dashing hopes for a summer rate cut.
Powell has made it clear: the Fed is in wait-and-see mode. That’s a tough spot. If tariffs stick and inflation climbs, the Fed tightens. If growth falters, the Fed eases—but not if inflation is still a problem. The balancing act continues.
Going Forward
Based on the median forecast of 51 equity strategists, analysts, brokers and portfolio managers collected May 15-28 by Reuters, the year-end target for the benchmark S&P 500 is 5,900 – roughly where it is today, That’s a sharp downshift from earlier projections of 6,500 and reflects a broad consensus: the market’s run may be running out of road unless trade chaos clears.
Not surprisingly, Tom Lee, chief investment officer of Fundstrat Capital, sees more upside. While he calls the May rebound one of the “most hated” rallies, he notes that investors flip bullish as soon as the market makes an all-time high. The S&P 500 is now just about 3% shy of that mark. According to Lee, that’s close enough to trigger a sentiment shift. “The market is climbing a wall of worry. And that’s bullish.”
Final thought: May gave us a rally no one seems to trust, an economic backdrop no one can predict, and a Fed with its hands tied. If you’re feeling both optimistic and queasy, you’re not alone.
I remain invested. But hedged.
And For What It’s Worth…
As reported in The Week magazine, Dutch scientists concluded that the universe will die “much sooner than expected,” with all stars set to burn out in 10 to the power of 78 years – that’s one with 78 zeros – rather than the previous estimate of 10 to the power of 1,100 years.
Let’s make the most of it.
As noted before, long term, the strategies will get the trends right. Short term, there may be a miss or two as the market juggles conflicting signals. So keep allocations of strategies reasonable within your portfolio, and remember that protection* remains paramount.
--David
_____
* WHAT DOES PROTECTION LOOK LIKE?
At the extreme, it’s cash. As I mentioned last month, it’s OK to hold some cash. Cash is, in fact, a position. It means you’re prepared to act when circumstances better align with your risk tolerance.
Protection can mean an overweight position in a model built for protection. Lower volatility and lighter drawdowns often indicate that a model is more protective in nature. Bond Bulls, for example, has the lowest volatility and max drawdown of any of the models.
Check out the updated white paper Conservative vs. Aggressive Portfolios for a list of all the strategies ranked from lowest risk to highest in terms of max drawdown.
Protection can mean putting multiple strategies to work in a portfolio, especially when those models tend toward an inverse relationship with each other, or focus on different asset classes or market sectors. Think Bond Bulls and American Muscle. Or Global Trader and The 12% Solution. Or even a bit of the Zen Knuckle combined with a couple of the above.
Because each strategy uses a slightly different mechanism to identify market risks, and because each can employ different funds representing different market sectors (although there is obviously some overlap), there is beneficial diversification at work when using multiple strategies within a portfolio – helping to reduce volatility and max drawdown.
Further down the page in Conservative vs. Aggressive Portfolios you can see examples of various combinations and how they have performed over the years.
Protection can mean keeping an eye on provisional picks during the month. These can provide a heads-up on potential trends -- and breakdowns of existing trends. Look for asset class shifts (a switch from an equity fund to a safe harbor asset like cash or bonds, or the contrary).
See if such a shift holds up for a few days. Not every such move is a trading opportunity or justifies a rebalancing, but information is power.
Finally, employing stop-loss and stop-limit orders. A stop-loss order is an order placed with a broker to buy or sell a specific stock (or ETF) once that asset reaches a specific price. It's designed to limit an investor's loss on a security position. While not perfect, and you'll find my own pro-and-con thoughts on the Q&A tab in the Members Pages, stop-losses have their place in risk management.
Read more on the Investopedia page for Stop-Loss Orders.
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