Better than expected outcomes.

Hello All,

I recently shared some thoughts on market volatility and wanted to follow up with a few additional insights. There’s no doubt that uncertainty around the direction of the U.S. economy is weighing on sentiment, and the ongoing tariff situation adds another layer of complexity. That said, I’d like to offer my perspective on where capital markets may be headed and how to think about the current environment.

One thing I’ve consistently observed throughout my career is that market pullbacks tend to broaden leadership. They create an opportunity for leadership to shift away from the top seven holdings in the S&P 500, allowing for a healthier and more diversified base of participation as the next leg of the bull market takes shape.

My initial belief was that tariffs are ultimately being used as a bargaining tool to secure more favorable trade deals for the U.S., although, in my opinion this feels rushed and haphazard. However, when the administration states that “tariffs will bring in $600 billion in revenue,” it gives the impression that these measures are intended to be permanent. At the same time, they highlight that “50 countries have already reached out to start negotiations,” and mention that Thailand is willing to drop its tariffs to zero if the U.S. does the same. This mixed messaging makes it difficult to discern the long-term direction or intent behind the tariffs.

Right now, the greatest source of market volatility is this uncertainty—especially given the elevated risk of a recession. I am unsure of how long the US economy can continue to take a tough protectionist agenda. Ideally, this tough stance on trade will eventually pave the way back to freer trade agreements, but the path is far from clear—particularly as traditional allies begin pivoting toward China for trade partnerships. 

That said, we are still in the midst of a secular bull market, which is expected to continue into the mid-2030s. Historical patterns show that even during past secular bull markets, we’ve experienced two to three recessions. While these downturns are painful in the short term, they have historically presented strong buying opportunities for long-term equity investors. See the secular bull and bear market chart below going back to the great depression below.

In short, keep an eye out for better than expected outcomes.

Note: Recessions are colored in grey.

A significant driver of resilience in secular bull markets is demographics. With Millennials—the largest generation—now entering their peak earning years, this demographic trend supports the case for continued strength in the secular bull market moving forward.

From another angle on market health, the current VIX term structure is offering valuable insight into the next three months. At present, we’re seeing a shift from backwardation toward a more typical contango setup, where longer-dated VIX futures are priced higher than near-term contracts. This normalization suggests that market participants expect volatility to ease through June.

Given the current elevated volatility—nearing levels not seen since the height of the COVID crash—this may present a strong buying opportunity for long-term investors over the next 60 to 90 days. While there’s always the possibility of further spikes in volatility, the current setup could bring favorable entry points for adding long-term equity exposure over the next few months.

Note: In a standard VIX term structure, contango (normal) occurs when longer-dated contracts are priced higher than near-term ones, reflecting expectations of gradually rising volatility over time.

Ultimately, if the trade war doesn’t drag on, we might see a quarter or two of GDP contraction. Still, the market is likely to find a bottom well before that, potentially presenting some solid opportunities for broad market exposure. In the meantime, we’ll stay patient and watch for better-than-expected data or developments that could shift sentiment. There’s a chance we could be looking at another “V” reversal, but we’ll need confirmation before making that call.

For perspective's sake, the trade war in 2018 was followed by a 20% pullback in the S&P 500 and lasted 3 months top to bottom. Since that time, the S&P500 has gained 141%.

I hope you are well and look forward to catching up soon. Let's keep an eye out for better-than-expected outcomes!

Thank you for reading,

James Anadon