Navigating market challenges: Insights from Jurrien Timmer

Impact of tariffs and cyclical vs. secular bull markets

The S&P 500 recently experienced a significant decline of 21.5%, raising concerns among investors. Timmer pointed out that while this drop is noteworthy, it may not necessarily indicate a bear market. He referenced historical quick recoveries from similar 20% drawdowns, such as in 2018, suggesting the market might rebound swiftly. Despite this decline, caution remains about declaring an end to the cyclical bull market that began in October 2022 and has now reached its median age of 30 months.

Reflecting on the past five years, the market has weathered various storms, including the COVID-19 pandemic and tariff disruptions, and has consistently recovered. Timmer highlighted that while the bull market’s end is possible, it's important to observe market behaviour and recovery patterns before making conclusions. He discussed 'mini bears' or 'bear-adjacent markets'—quick 20% drawdowns that were recovered rapidly—indicating that such trends might not signal the end of the bull market but rather temporary corrections.

Liquidity issues and bond market stress

Recently, yields in the bond market rose sharply within days, presenting notable changes. Timmer explained that this rapid increase prompted intervention from the U.S. Treasury to stabilize bond market yields. This situation reflected the complexity of the current financial landscape, particularly in times of liquidity air pockets.

Potential structural regime changes and de-dollarization

The historical context of the gold standard and Bretton Woods systems was discussed, noting the shift towards mercantilism could weaken the dollar's dominance as a reserve currency. This potential shift raises questions about U.S. exceptionalism and growth stocks. It was emphasized that international investors own significant U.S. assets, and a structural change could have major repercussions for asset allocators. The declining share of dollars in global reserves and the importance of considering long-term structural changes in investment strategies were highlighted.

Earnings forecasts and market expectations

The importance of monitoring predictions for the second and third quarters was emphasized. GDP growth estimates have been cut to around 1% real growth, and earnings estimates for Q2 and Q3 are being revised down, indicating a slower economy. While the market has not repriced to recession levels, it is adjusting to a slower growth scenario.

Conclusion