The S&P 500 saw a 10% move up on April 9th following news that Trump will pause tariffs for 90 days for most countries except China.
A 10% move up within a single day is extremely rare in market history, only occurring a handful of times:
- At the end of the COVID pandemic
- Towards the end of the great financial crisis
- Right after Black Monday in 1987
So now the key question becomes:
Are we on the brink of a market melt-up over the next few months, or is this big bounce just one massive trap with stocks set to move lower?
What has been driving the stock market lower over recent weeks isn’t just tariffs themselves.
It’s the potential that tariffs have to catalyze an economic recession.
So the real question is whether recession risks magically disappear if tariffs don’t get implemented, or whether the path towards economic recession is already set in stone?
The Recession Playbook
One of the key defining characteristics of a recession is rising unemployment rate.
All U.S. recessions going back to the 1940s, without exception, have seen the unemployment rate rise.
If we overlay the S&P 500, these periods where unemployment rises coincides with large drawdowns in U.S. stocks.
So if we’re truly heading into a recession today, despite Donald Trump’s pause on tariffs, we should see the unemployment rate rise during the rest of 2025 as the labor market cracks.
IF that’s what’s in store, there could still be plenty of downside left for the S&P 500.
Historically, stock market bottoms during economic recessions typically don’t happen until the unemployment rate has actually peaked – which could still be months away.
Before we make you panic, let us share one of our favorite macro indicators: the yield curve.
This incredible tool gives us additional information regarding the state of the job market.
Throughout history, the yield curve and unemployment rate tend to move in the same direction.
Throughout 2023, the yield curve had been inverted (below zero).
In the past, this has been followed by rising unemployment and recession.
Typically, recession begins when the yield curve does what’s called a “steepening” – coming out of inversion.
That’s usually the signal that the economy is entering a recession and likely to see unemployment rise.
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A Very Different Yield Curve Behavior
Today, we can see that despite the stock market decline, the yield curve has reinverted.
This is very different from what we’ve seen historically when the market prices in an economic downturn.
For example, In 2008, when the stock market crashed, the yield curve steepened.
That’s textbook recession behavior.
Even during the 2001 crash, as the S&P 500 declined, the yield curve steepened.
So for now, today’s yield curve reinversion is telling us that the curve is not expecting the labor market to break just yet…
What Yield Curve Reinversion Could Mean
Today’s yield curve reinversion looks similar to previous instances where the unemployment rate continued to trend lower as the economy avoided a recession.
These were periods when the stock market performed quite well eventually.
We’re actually fairly constructive on the overall economic outlook right now because this does not look or feel like a textbook recession.
If tariffs stay on hold and trade negotiations lead to favorable conditions for U.S. companies, it could provide a constructive backdrop for the economy and markets to thrive.
The Gold-to-Silver Risk Signal
The yield curve reinversion is the positive side of the story, keeping us open-minded about this being just a typical growth scare correction rather than the beginning of a recession.
That said, there are always two sides to every story.
One signal that’s keeping us on edge is the gold-to-silver ratio that jumped 15% within a single week.
This is a major risk-off signal because it tells us traders are dumping silver (seen as higher risk) for gold (seen as a safer haven).
We’ve only similar jumps in the gold-to-silver ratio like this a handful of times over the last 20 years:
- Right at the beginning of the COVID crash
- Before a 20% decline in 2011
- Before a 50% decline during the Great Financial Crisis
While we certainly don’t think investors should panic out of positions right now, we’re also not rushing to aggressively reallocate to stocks yet.
At Bravos Research, we’re staying patient
We want to see real bottoming signals before we significantly ramp up our equity exposure again.
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