The Trading Floor: Why the S&P 500 Just Rallied 20% in 5 Weeks
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Welcome to the Market Maker podcast, hosted by me, Anthony Chung, where every Friday I talk to a member of the team about what happened in markets this week. From macro themes and single stock news to cryptocurrencies and careers in finance, our aim is simple, to make finance interesting and easy to understand for everyone. So let's get to it.

All right. It is the end of the week. Hope everyone's had a good one. I'm pleased to say if you're in the UK, the sun has started shining again. Fingers crossed as we go into the weekend. But not only that, you know, cheerful note, but it's because the S&P is current. It's on track for one of its best weeks this year. We're back, baby. So here we go.

Was it ever in doubt? We've had a lot of doom and gloom. There was a lot of anxious listeners out there over this roller coaster of the last, I guess, 10, 12 weeks or so. But this week, to focus in on, we had Tuesday's lower than expected inflation figures in the US and that added fuels to the rally that was already in play, sparked by Donald Trump's deal with China to cut tariffs, albeit temporarily.

You've had Goldman's increasing their forecast for US earnings growth, year-end S&P targets, other banks have followed. It hasn't all been sunshine and rainbows though. I did clock Steve Cohen, the founder of the hedge fund Point72. He's

quite a bit more pessimistic. He was talking about the chance of a recession in the US is still close to 50-50 in his opinion. But look, in this conversation, we can talk about, and I think it's important to, because the speed of this turnaround has been pretty phenomenal. So break that down, have a little look at the CPI numbers. And also you and I were talking earlier in the week about

Okay, so what's next? There's obviously a lot on the trade side, a lot of uncertainties, but also we've had some more colour about the impending US debt ceiling. A couple of Treasury officials, a bit of movement on Congress. And so how does that link to other headlines that have emerged in the past week around talk of regulation on bank capital requirements?

And what's that got to do with the debt ceiling? Is this now the next big thing to look for in financial markets if you're trading, investing, following with interest? And also, just like the debt ceiling, I know from recent history, this will be like the doomsday scenario, end of days, as far as the media will be telling us. But I'd love to get your analysis or take from your experience to understand what

What has that looked like through the episodes of this happening from 2011, from 2021, and all these other periods when they've done this before? And then finally, if we've got time, another positive note. Welcome to the positivity podcast. We had UK GDP better than expected. In fact, best in the G7.

come on team gb come on let's go but you know before we all get too excited there's probably a reason to reign that in which you're gonna also explain so yeah talk to me about the just this phenomenal turnaround that we've had in marcus yeah speed of rebound um

So let me take you back to February 19th. Okay, that was the, I'm going to talk about the S&P 500 here. February the 19th, 2025 was the all-time high. Okay. And that was at 6,122. Sorry, 6,150, let's call it, right? February 19th. It then dumped to 5,000.

And that took from February the 19th through till the lower the move was on April the 8th. Okay. So let's call that like nine weeks. Okay. So nine weeks sell-off, which was mainly driven by Trump tariff uncertainty, that kind of acceleration around what Trump called the liberation day, which was the 2nd of April, where he rolled out just monster tariffs across the whole planet. But

What's happened since that low on the April the 8th is almost a full rebound. Actually, in percentage terms, right, the S&P hit 5,000 April 8th. Here we are now, like five weeks later, it's almost at 6,000. That's a 20% rally in the world's biggest stock index in five weeks.

I mean, that is literally kind of unprecedented. It's like emerging market volatility here. But look, the rebound is obviously reversing a lot of that stuff that sent it plummeting in the first place. And this is something, actually, I read a thing on the FT, like one of my go-tos is the unhedged newsletter. I would recommend it to anyone. It's part of the FT, a daily sort of newsletter. But they lean anti-Trump.

And they've coined this terminology, they've called it the taco trade. This buy the dit has turned into a, their new version of it is the taco trade. Taco standing for Trump always chickens out. So the point is that Trump will threaten Trump.

and bully and write China, you're going to have 145% tariffs now on everything. Yeah. See how you, see how you like that China. Uh, then markets plummet and collapse. And then he goes, Oh, whoa, whoa, whoa. Hang on. Hang on. Hang on. All right then. Fine. Fine. Instead of 145%, let's just make it 30. So this is what's happened. Trump has, uh, and China, uh,

have been engaged in talks in Switzerland, like multi-stage, multi-day talks over last weekend and into the start of this week. And look, the talks have been positive and they've kind of been a bit more pragmatic, both sides, and said, look, no one wants a disaster here. I mean, obviously, if they continue on that path that they

that Trump had set where it was right, increase tariffs, retaliate, retaliate, retaliate, and suddenly you're getting 145% tariffs on everything that would lead to certainly a recession in China, most likely a recession in the US, therefore a recession across the whole world. They've said, all right, let's all calm down a little bit. But I think the interesting thing and the reason why the speed of the rebound has been so crazy is because

They've reined it in by more than people were thinking they would. So they've made further strides and concessions. So moving it from 145% tariffs to 30 is a bigger move than people thought. And then China in response, they've taken their tariffs on the US and they've chopped them down to 10%.

Which again is a move to a lower position than anybody possibly imagined so early on in what were, you know, pretty, you know, only the beginnings of some negotiations. Too big to fail. Both the US and China in supply and demand. Like literally.

So the taco trade, on the day where they announced this pullback on tariffs, that's both US and China, the S&P rallied 3.3%. NASDAQ was up 4.3%. The dollar rallied 1.5%. I mean, those are numbers, right? To put it in context, that S&P move, 3.3% up in one day. That put it at, this was the 12th of May, okay? That put it at the third...

biggest single day rally in the last five years. So, you know, these are big, big moves. And I guess I've been stepping back a bit from, you know, tariffs and the reason for the episode this time. I think the pattern of things is that markets do move faster than they ever used to. I think the speed of travel

When volatility kicks off, I think the speed of travel is greater. And look, that's probably a function of the algo. I think the function of two things, the algo driven world that we live in. So the majority of volumes trading through these markets are algo driven. I think there's, you know, a lot of big hedge funds with what we call short term fast money markets.

kind of ammunition who are kind of jumping on these momentum moves, even though they're very short, which just accelerates it. So you kind of got all that sort of thing happening. Then I think on the other side, it's the buy the dip retail market and the retail market has become, it's just become more powerful.

As the years go by, access to markets, get your mobile phone out and you can be trading huge quantities of money, click of a button. So I think that is a key player also in the speed of this rebound. So talk to me about the economic picture then, because we did have some important US data that's come out and seemingly is just going to push this market into a good finish for the week.

Yeah, so inflation. I mean, if you're a listener to this podcast, then, well, thank you. But you'll hear us banging on about inflation all the time, and that's because it has been the most important thing in this journey over the last few years as we've been through an inflation crisis, the cost of living crisis, if you will, and then the kind of returning of inflation back to normal, normal being 2%, and how

ultimately that journey back to two has been really painful because we kind of hit 3% and it got stuck.

And what's the meaning of that? Well, obviously, prices are still going up. So maybe the consumer gets hurt by that still. But really, the most important thing is it's prevented the Fed from being able to cut interest rates from what is still a really high level, right? The Fed cut interest rates a couple of times last year, but they've been so far in 2025, here we are, we're midway through May and no cuts at all.

We're not expecting a cut until maybe July at the earliest, maybe even September, right? But this data on Tuesday on the CPI print, which was lower than expected, has just opened the door to the idea, well, actually, maybe this inflation thing is going to hit too. Maybe the Fed can hit the button and start to cut in their July meeting. So that's obviously really helped with the fueling, the positivity here, and just helping to speed the rebound.

But maybe to put some numbers on that inflation thing, I think the most important thing, the headline inflation was at 2.3% year on year. So again, just as a reminder, that means that prices of goods in the US system went up 2.3% April 2025 versus those same goods and their prices in April 2024, right? So 2.3% rise. Why is that important? It's the lowest reading

since 2021. Okay, so it's actually more than four year low. And it took out like last year in 2024. We all got really excited in August, September last year, when inflation smashed down through 3%.

September last year, it hit 2.5. September, it hit 2.4. And we thought, all right, awesome. It's going to be hitting 2% by November. Come on, Fed, let's go. And the Fed cut rates by 50 basis points. And we thought, inflation's done. Let's go. The rate cutting cycle begins. What then happened was

Well, inflation went back up. Not only did it not hit 2% from September, it then climbed through till December. It climbed back to 3%. And this is why the Fed have been like, damn it. All right, fine. We can't cut then.

But now we were 3% in January, 2.8% in February, 2.4% in March, 2.3% in April. There's a direction of travel. People are getting excited again. Can we get multiple cuts from the Fed this year? Yes or no. And the data on inflation has tipped the balance into the yes camp. But look,

We'll see. You could easily just get a repeat of last year where rebounds go back up. Yeah. And obviously we always say with data, you were listing those numbers there. And this was the third straight month of softer than forecasted numbers. And the goods categories exposed to higher tariffs, including new cars and apparel, didn't see the kind of price increases that economists had expected to have seen.

So again, just a bit more detail there. But perhaps let's push this on and let's talk about debt ceiling. Well, hang on, hang on. There's an important point to make before we do. These inflation figures, don't forget,

Tariffs, right? And everyone's going, well, look, it doesn't really matter what inflation's done behind us. Are tariffs going to lead to inflation going back up, preventing the Fed from cutting? Yes or no? This inflation data in April is the very, very first month where there's tariffs in the mix. Remember, Liberation Day was the 2nd of April. So the most important thing out of this report, whilst it's super early still,

The most important thing is it doesn't look like tariffs are showing up in the inflation data. It looks like early, early, early days, it looks like tariffs are not pushing inflation back up. There's a couple of, there was one in there that was furniture costs.

And a lot of furniture gets shipped into the US. So it's an import, which obviously then is at risk from tariffs. That actually bumped up quite sharply, 1.5%. So out of all of the figures, mostly it looks like, you know what, tariffs are going to be fine for inflation. Don't panic. Except for furniture, which is, oh, hang on. All right.

Maybe it is showing up. So there is that thing. So I say generally, that's why people are most positive about this report. It's like, all right, why are we panicking about tariffs? Maybe it's not coming. So forget tariffs because what else have we got to worry about? Because we're human and all we like to do is worry. Do you know what? That is the most stupid...

phrase but it's exactly what defines often markets it's like we're just not satisfied unless we're panicking about something it's just human nature and and that next thing is not that far away is it no on that psychology side it kind of does make sense right if you're risking money

All right. You might be trading for your employer. I don't know. Maybe you're a hedge fund trader. Maybe you're trading or investing for an asset management firm, right? You're trading your client's funds, right? Or you might be trading your own money. It might be your, I don't know, managing your SIP, your pension. Maybe you've got

a spread betting account, maybe you've got a bit of crypto, whatever it is, and you're trading your own money. This is your own money, right? Or your client's money. You've got a big responsibility there to not cock it up and lose it all, right? Because that would be very painful. So,

It is right to always be, as you're plotting along, you know, get some strategies in place, you know, be confident in those and give your trade some patience to run. But at every step of the way, it's like you're kind of, your advanced centuries are out there kind of scanning the horizon, right? What's coming? Are there any risks on the horizon that might trip us up? And we need to be scouting, right?

and monitoring. And so it's quite right. All right, tariffs may not be the risk we thought they might be when the market was dumping second half of February, but what else is out there that might trip us over? And so two words for you to answer that question, debt ceiling. Right. So we have got a hard stop in 18 minutes, Piers. So I'm going to try and do this quickly. So first off,

Not everyone's going to have even have lived through a debt ceiling situation to start with. So quickly, definition of debt ceiling. So this is a self-imposed rule where the US Congress, the government, have a limit on how much they can borrow.

And it's just to kind of control things. And periodically, normally every couple of years, that limit gets reached because the amount of debt the US have is climbing and climbing and climbing and climbing. So then they just raise it, right? They raise the debt ceiling. And then a couple of years later, they hit it. And so then they raise it. And then a couple of years later, they hit it. But every time we approach it and are about to hit it and hit it, there's a real political...

gamesmanship, because the Republicans and the Democrats use this moment to try and leverage in some of their other policies, because Congress has to sign off on raising the debt limit, right? So look, we hit the ceiling in January this year. It's $36.1 trillion. So what happens? What happens is the Treasury cannot issue new debt.

whilst the debt ceiling remains where it is and hasn't been raised so how does the government go ahead and pay for all of its stuff you know fiscal workers how does it pay sorry federal workers how does it pay for all of the schemes they're running well then here they're dipping into let's just simplify it they're dipping into their savings account it's hard to know how much is in there i've heard some different figures but it's around about 500 billion dollars

And each month they're paying that that is decreasing and decreasing and decreasing. So the key here is when will the government run out of money? And they're calling this the X date. And we don't know the exact answer. Rough guess, mid-August. So the government have got until the middle of August to agree terms and raise the debt ceiling, allowing the treasury to borrow money again and fine, refill the coffers and they carry on as normal. Okay.

But each time we go through this episode, there is a risk of default. There is always a risk, a small one, that they can't agree and the US default on their debt. And if the US defaulted on their debt, I mean, that's like Armageddon, game over, the world no longer exists kind of moment.

So you've got a good 20 years market experience in the bank. So you've seen more than one of these because it's been revised, the debt ceiling, and it's more than a century history, more than 100 times. So does the market even care about this? What can we take away from, has there been a change over the pattern of even your two decades where it was a big thing, it still is, or it's not a big thing nowadays?

So it kind of happens every two years, but there's three that stick out as major events in my time in markets, 2011, 2013, and 2023.

2011 was the biggest one, the biggest episode in terms of market ruptures and reactions. The S&P dropped 19% in two weeks as we went through this debt ceiling debacle and the government couldn't agree. The S&P Ratings Agency downgraded US debt from AAA to AA+, first ever debt downgrade for the US in their history, right? Markets just plummeted. Now, a function of that was we were just out of the financial crisis.

Okay. And so there was a lot of risk. Europe was going through a massive Eurozone debt crisis at the time. So the global situation was very vulnerable. So there was other things that played into it. Okay. But anyway, the government agreed. They raised the debt ceiling. Fine. Back on track. Okay. 2013, we had another episode where the government had to shut down because they couldn't agree and they're running out of money so fast. They literally closed the government for like two weeks. But the

The S&P didn't even bat an eyelid. Didn't go down at all. 2023, again, quite another big episode. But again, the S&P didn't move. So the last two big ones, stocks haven't cared. They're just like, look, this always happens. They'll sort it out. Let's just ignore it.

There is one market that does care. That's what's called the CDS market, which is a credit default swap market, which is basically insurance on debt defaulting. Because if worst case happens, they default, well, what are they going to default on? Well, they're going to default on their debt that's hitting maturity, like

in September. Okay. So this will be most likely their short-term debt, right? So insurance on short-term debt, the insurance premiums jumped higher in 2023. They're rising now as we go into this summer. But I prefer to look at it a different way, right? This happens all the time. So what's different this time? And should we be more worried about it this time? Or actually, is it just going to be an episode like all the rest, where it's a bit of a storm and a teacup

It gets sorted and we move on. So I think here are my list of factors as to why it's a bit more important this time. Firstly, the amount of debt, right? The US government has 124% debt to GDP ratio, okay? On average from 2010 to 2020,

right? Post-crisis, but pre-COVID. On average, they had about 100% of GDP debt, right? So it's jumped significantly higher because of COVID, right? We've got way, way more debt. Now, the problem is, on top of that, interest rates have jumped. So the Fed have taken rates from between 2010 and 2020, rates were zero.

Now they're 5%, right? So if you have really high interest rates on way more debt, then what you have is interest costs that have just gone through the roof. So again, between 2010 and 2020, roughly per year, the US was spending $450 billion on their debt interest payments, 450, right? Do you know what it is this year? It's estimated to be 950.

So it's doubled and it's expected to go higher and higher, break the one trillion barrier. This is just interest on the debt. Forget about actually paying it back as well, right? So look, this makes things more risky, but you could say, well, more reason for them to sort it out then and not do anything stupid. But look, there's policy uncertainty risk because Trump's back in town and who knows what he's going to do, right? Because of that, foreign buyers...

I've kind of shied away a little bit, some think. And so is there foreign demand in this US debt like there has been in the past? And if not, well, then you might have a liquidity issue, which will exacerbate things further. Can the Fed cut rates to help? Well, that inflation figure earlier in the week kind of helps with that. But still, the Fed still are on the fence where they're like, yeah, we're not sure whether to cut yet. They might not cut until towards the end of the year, right?

So, look, I think there's more risks here. I think if they do cock it up and don't make an agreement, it'll be a way more spectacular blow-up than it would have been at any of the other previous episodes, right? But as you say, that could mean

even more reason to sort of act. So the Fed are independent, the Fed are more almost reacting to what the administration does, but the administration has involvement with the treasury and the treasury and the regulatory environment. So what's the other angle here that a lever that Trump could pull to help the situation?

Well, the other angle, so I've mentioned the word liquidity there, right? And actually we saw an episode in this. So liquidity in the treasury market, so US government bonds, there was an episode during the liberation day blowout where stocks plummeted. Well, bond markets kind of went through the roof and yields dropped sharply and then it swung back. There was huge volatility in bond markets telling us

the liquidity levels in that market had dropped, which is super dangerous, right? Now, if we go into the summer here and this debt ceiling crisis escalates, and the closer they take it to the wire of where the government's going to run out of money before they agree, the closer they get to that X date

The more uncertainty, the more risk, the more market fallout you might see, and the less liquidity there's going to be in the market, especially if foreign buyers are pulling out, right? Now, banks are normally one of the big banks in the US are the big players in the treasury market. However, ironically, kind of regulation that came out of the financial crisis, core tier one capital ratios and the like have basically, there's been an unintended consequence of

where these risk ratios to prevent a 2008 crisis have actually meant that banks can't buy as much treasuries anymore, which has meant that the liquidity in those markets has dropped. So actually, big news this week, the Trump administration are looking to reduce the regulatory capital requirements on banks. And I think this is 100% preparing banks

and just trying to get a bit more liquidity in these treasury markets as we go into this debt ceiling episode. Okay, so if I'm hearing what you're saying correctly, you're saying that there's more debt and it's compounding faster than it's ever done. The risk is bigger and...

Basically, we've got one of two options here. I'm going to go with the one where that whole infrastructure that was put in place exactly to stop a repeat of the global financial crisis in 2008. You're saying, no, we're going to actually loosen things. We're going to add some liquidity to just offset any potential bumps here because you know what?

the world's not going to end, the bomb's not going to go off. I think we can risk it. So the risk increases. So doesn't that just mean that pattern you said, stocks might have a diminishing return kind of impact in terms of its sensitivity to debt ceiling talks. This thing always goes gangbusters in the media.

All the things you said, I think are going to fuel it this time. That VIX or sensitivity that you're going to see, can't we just go long now and then short on the fade? Because it is too big to fail. Just take out some option plays. You're getting me excited here, Pierce. Look, this will be a thing. When it hits the mainstream media, I can't predict entirely, but I'd say when we get into June...

Um, it's going to be a thing. Besant has set the Congress a mid July deadline, like a Lucy's Besant has said, look, you need to sort this out guys by mid July. Don't let me down. Right.

They'll let him down. You know, they're not going to sort it by mid-July, unless Trump pulls his magic, but who knows? So I would say when we get into June, this is going to start to become front page news. This will fuel the fire and the angst, and it will be the next risk that markets really latch onto. And then, yeah, it's really hard to predict how quickly they'll resolve it, but they will.

You know, the consequences of not resolving are so monstrous that of course they will. It's just when and how close do they go to the wire? Yeah, I think I remember the shutdown that they had.

It was the end of 2018 into early 2019. I think that was the longest one ever. And if you remember it, that was Trump. And that was Trump. He was like taking it to a whole new level. In all these previous occasions that I can remember, Congress was always split. And so therefore, you have two actual polar opposite sides of the political spectrum.

Whereas now, aren't things different? Isn't there more unity? I know that that's not true completely in the Republican Party, but in order that this doesn't need to become such a big thing. So, right, you could say the risks this time around are a lot lower because the Republican, it's a clean sweep.

Meaning the Republicans have a majority in the House of Representatives, they have a majority in the Senate, and they hold the White House, of course, Donald Trump, right? So you could think, well, there's going to be no disagreements and they'll just sign off this debt deal and raise the ceiling, right? It's just that the Republican Party is quite fractured on this topic. And there's certain parts of the Republican Party that are definitely not happy to raise the debt ceiling at all.

Right. So it's almost like an internal Republican Party issue that means the risk is still there of disagreement and whether this gets through or not. But Trump's Trump. And yeah, look, they'll get the deal done. Right. It's just timing it is tricky. So can we not take that trade then? Can we not just say that we're far enough out that it hasn't started to kick off yet?

So we could get a pretty good price now. Yep. Lock it in. Look for like a crazy breakout. It's going to happen probably a week before the imposed deadline. Let's go. Okay.

This is not investment advice. This is just hypothesizing. All right. Well, look, we're going to have to end the conversation there for this time round. I have already this morning just recorded a new hot take from Stephen on the latest

biggest IPOs that have been happening including the likes of eToro and also we talked about for UK things like Revolut and so forth so yeah stay tuned for that remember to subscribe and that show will be going out on Monday morning all right thanks everyone and enjoy the weekend yep have a great weekend

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