To Inform:

This week, Joseph Group’s CEO Travis Upton and I had the pleasure of sharing our latest thoughts on what to make of markets in light of a tremendous shift in global trade policies. Borrowing a turn of phrase from a DC-based policy researcher, I likened what we’ve seen regarding tariffs over the past couple of months, particularly since April 2, to spinach. Spinach is that thing that elicits a painful response, but the promise of candy as a reward can blunt the impact.

This spinach has injected a degree of volatility into the S&P 500, which is somewhat rare in the historical experience. It isn’t necessary to fully understand what the chart below is saying, but what it captures is the realized (backward-looking) volatility in the S&P 500 over the last month. Elevated volatility simply means the magnitude of price changes is high. This is the market on spinach. Past environments with such elevated volatility include early 2020 when COVID-19 was breaking out, 2008 with the Financial Crisis, and 1987 with “Black Monday” when the S&P 500 fell 22% in one day.

Source: X.com

What is interesting when we look at these past episodes of elevated volatility, we find that volatility collapsed in relatively short order. In many of these episodes it was some form of “candy” that ameliorated the spinach spoiling the market’s dinner.

So far in 2025 we’ve had mostly spinach, but the candy is coming. There are a few different ways candy may appear to investors, one of which has been the steady de-escalation in tariffs since early April. It began with the 90-day pause announced on April 9, and has continued with certain exemptions and carveouts, as well as news of talks with a number of countries and even the tone of conversation between the US and China becoming less adversarial.

The other piece of candy that we’re watching is with tax policy in Washington, D.C. It is widely expected that Congress will largely extend (with some modifications) the Tax Cut and Jobs Act that was enacted in 2017. While that move would largely be status quo, there are ideas being bandied about that, combined with tariff revenue, wouldn’t increase the deficit but could increase economic growth.

Some of these ideas include things like R&D expensing. This would allow companies to immediately expense the costs of research and development (and lower their taxes as a result) as opposed to amortizing the costs over five years. Another idea is to reinstate the bonus depreciation rules. Up until 2022 a provision in the Tax Cut and Jobs Act allowed companies to fully expense capital equipment. That has since come down and is set to expire after this year. If this is extended, companies are more likely to invest in equipment. For households, one idea being discussed is a modification to the cap on State and Local Tax Deductions (currently $10,000). For households in high tax locales, this would reduce their tax burden.

We don’t know when or in what form, but we think candy is coming. Markets perhaps are sniffing some of this out, as volatility is settling into a lower range, and the market is off the worst of its lows. While the line from an uncertain, volatile environment to one of more certainty and less volatility is never a straight one, history has shown us this is often the case, and candy is one great way to get there.

Written by Alex Durbin, CFA, Chief Investment Officer