Weekly Market Report: April 11th, 2025

Market Anecdotes

• Crazy gyrations in the bond market and the fear premium fed into a midweek decision to surrender to reality, announcing a 90 day pause (except for China) on the demolition day “reciprocal” tariffs sparking a torrential rally in equity markets. So, what’s in place today?
• Volatility and scope of this market dislocation is unprecedented with the world anxiously awaiting clarity and/or relief through diplomacy, legal/constitutional, fiscal, or monetary.
• The trade war is in full effect as both China and the EU announced retaliatory tariffs. POTUS responded to China’s retaliation with a return volley on Chinese imports, now totaling 125%.
• The Fed provided markets some much needed assurance that it stands ready to step in if needed to maintain market functioning and liquidity.
• FOMC meeting minutes released last week were unremarkable but comments regarding tariff impact on the inflation outlook including “heightened risks of unanchoring inflation expectations”, higher “hurdle to adjusting rates”, and higher inflation outlook are notable.
• First quarter earnings season kicked off on Friday with the Street looking for 7.3% YoY growth.
• Over the past couple of weeks where we’ve seen -11% in two days and +10% in one day, Cliff Clavin reminds investors the best move is no move as opposed to needing to get two moves right, both the sell and the buy.

Bullish Asset Allocation Narratives

• Capitulation levels became evident in bond markets last week while equity markets continue to look for
  clarity and progress toward trade normalization.
• An economic slowdown is widely expected as obstacles to global trade weigh on growth but the scale will be
  determined by the duration of the structural imbalances.
• The private sector (corporate, labor market, consumption) remains relatively healthy.
• Market volatility, poor POTUS approval ratings, or concessions will ultimately trigger trade deals.
• Stagflationary tariff policies are unlikely to persist in the intermediate or long term after which fiscal
  stimulus (tax cuts) and deregulation may well resume the bullish narrative.
• Depending on relative weights of tariff related inflation and tariff related sentiment/demand destruction,
  we may see a more rapid removal of restrictive monetary policy .
• Fiscal stimulus and structural reform are set to boost growth in Europe, Germany in particular.
• AI efficiencies are in the early innings of impacting productivity, inflation, and growth.
  Bearish Asset Allocation Narratives
• Risk aversion is likely to persist until heightened uncertainty surrounding trade policy, monetary policy, and
  fiscal policy begins to clear up.
• A continuation of adverse trade policy and retaliation would accelerate deterioration in sentiment and
  economic growth, representing a key risk to markets and the overall economy.
• A slowing labor market and negative business and consumer sentiment have the potential to lead to a selffulfilling
  decline in business spending and hiring as well as personal consumption.

Weekly Market Report: April 4th, 2025

Market Anecdotes

• The Trump Shock of 2025, due to announced tariffs on U.S. imports of nearly 22% were well beyond what markets were expecting, translated to a top 20 worst two days in market history.
• The unexpected and confusing logic/math from the CEA and subsequent retaliation from China tanked global equity markets and sent both bond yields and the USD sharply lower.
• Complicating things for the Fed, despite dire consumer and business confidence, the economy has yet to register a material slowdown as evidenced by the strong March jobs report and slowing but respectable GDP growth projections with Atlanta Fed at -0.8% and NY Fed at 2.6%.
• Fiscal policy narratives now include a potential tax hike on the top bracket to help fund TCJA extension and other promised tax cuts alongside skepticism on the current reconciliation deal.
• The legality and constitutionality of one single person making the decision to raise taxes is highly suspect. Expect swift and forceful challenges to the invocation of the IEEPA of 1977.
• The Cliff Clavin note of the week illustrates U.S. population migration from large cities to smaller/mid sized and from cold weather to warm is alive and well.

Bullish Asset Allocation Narratives

• Oversold conditions are present across U.S. equity markets, presenting a compelling buy the dip
  opportunity at some point soon.
• An expected and more material slowdown in growth has yet to materialize (corporate fundamentals, labor market, consumption) and the private sector is relatively healthy and not facing significant structural imbalances.
• Market volatility, poor POTUS approval ratings, or concessions will ultimately trigger trade deals.
• Stagflationary tariff policies are unlikely to persist in the intermediate or long term after which fiscal stimulus (tax cuts) and deregulation may well resume the bullish narrative.
• Depending on relative weights of tariff related inflation and tariff related sentiment/demand destruction, we may see a more rapid removal of restrictive monetary policy.
• The bond market, as evidenced by sharply falling interest rates, seems far more concerned with a potential slowdown in growth than with fiscal deficits, US debt ceiling, and unfunded tax cuts which lowers the cost of capital and smoothes the path to passing fiscal stimulus legislation.
• Fiscal stimulus and structural reform are set to boost growth in Europe, Germany in particular.
• Constructive corporate fundamentals which ultimately drive markets, remain sound.
• AI efficiencies are in the early innings of impacting productivity, inflation, and growth.

Bearish Asset Allocation Narratives

• Risk aversion is likely to persist until heightened uncertainty surrounding trade policy, monetary policy, and fiscal policy begins to clear up.
• A continuation of adverse trade policy and retaliation would accelerate deterioration in sentiment and economic growth, representing a key risk to markets and the overall economy.
• A slowing labor market and negative business and consumer sentiment have the potential to lead to a self fulfilling decline in business spending and hiring as well as personal consumption.

Weekly Market Report: March 28th, 2025

Market narratives last week were centered around fresh inflation data, negative impacts of tariffs, and the health of the U.S. consumer. Financial markets saw an increase in equity and bond market volatility due to heightened concerns surrounding inflation, growth, and U.S. government policy. Global equity markets closed down approximately 1.5% leaving year to date returns on the S&P 500, EAFE, and Emerging markets at -5%, +9%, and +5% respectively. Interest rates closed the week largely unchanged after a mid-week rise was offset by a safe haven bid on Friday. There were no major moves across currency and commodity markets where oil closed up $1 to $69.36.

Market Anecdotes

• A weakening outlook for the consumer and persistent inflation are clouding the outlook as soft consumer spending and labor markets are more in focus than tariff policies.
• Upward inflation pressure may be shifting from seasonal forces to tariff impacts which lie counter to slowing growth from a monetary policy perspective, laying the groundwork for some closely watched monetary policy and FOMC decisions going forward.
• 2025 is seeing a rare occurrence of sizable differences in stock market performance between U.S. and ROW. Alpine Macro highlighted three broad reasons including a reset of post election expectations, U.S./Eurasia fiscal policy divergence, and valuations.
• Apollo’s Torsten Slok noted registered border encounters have fallen to nearly zero in February which will inevitably translate to a significant decline in monthly job creation. Potential implications include lower breakeven payroll levels and labor shortages/wage inflation.
• The BPC noted extraordinary measures employed by the Treasury to avoid breaching the $36.1t debt ceiling can work until sometime between mid-June and October depending on tax receipts.
• Our weekly Cliff Clavin note comes from a Bloomberg piece highlighting nearly all stock market gains come from holding stocks overnight versus trading action from open to close.

Bullish Asset Allocation Narratives

• Looking through what thus far has amounted to a routine market correction toward fiscal stimulus (tax cuts) and deregulation remains our baseline guide to risk positioning.
• Market volatility, poor POTUS approval ratings, or concessions will ultimately trigger trade deals.
• The bond market is looking past deepening fiscal deficits, US debt ceiling, and unfunded tax cuts.
• U.S. monetary policy leaning slightly toward the incrementally more dovish side of the ledger.
• Fiscal stimulus and structural reform may boost growth in Europe, Germany in particular.
• Constructive fundamentals (growth and earnings) which ultimately drive markets, remain sound.
• AI efficiencies are in the early innings of impacting productivity, inflation, and growth.

Bearish Asset Allocation Narratives

• A weakening U.S. consumer is taking shape which can lead directly to labor market weakness.
• Oversold conditions are mounting in U.S. equity markets but not yet at capitulation levels.
• A continuation of adverse trade policy would accelerate deterioration in sentiment and economic growth, representing a key risk to markets and the overall economy.

Weekly Market Report: March 21st, 2025

Market Anecdotes

• Last week broke a string of four consecutive down moves in the S&P 500 with implied volatility in the options market suggesting the heavy storm clouds have passed by for the moment.
• Has the recent correction taken the air out of Mag 7 valuations? A look back at P/E suggests not quite yet with forward growth outcomes remaining to be seen.
• There were no surprises from last week’s FOMC and BoJ meetings where rates were held steady. The Fed updated their projections and will be slowing the pace of treasury QT runoff.
• The overhang of the upcoming April 2 tariff announcements remains the big drag on sentiment but also carries hope that they will spark a rash of negotiated settlements. We subscribe to the line of thinking that Trump will maintain a hard line until his approval ratings decline materially.
• Setting aside the risk of conflict escalation, last week’s U.S. bombing in Yemen could have a material impact on reducing global shipping costs and related inflation pressures.
• Research from Leuthold reminds investors of the contrarian nature of investor sentiment where the ten most negative years of sentiment were followed by an average return of 18.9% and the ten most positive years of sentiment were followed by an average return of 0.4%.
• Along the same lines, there is meaningful debate surrounding continued leadership of U.S. equity markets globally, supplemented by a January Goldman Sachs client survey suggesting consensus for continued leadership has rarely been stronger.
• Our weekly Cliff Clavin note shows New York, Illinois, and New Jersey as the top three states with the largest gambling degenerate populations as measured by revenue across the 38 legal states.

Constructive Asset Allocation Narratives

• Looking through what thus far has amounted to a routine market correction toward fiscal stimulus (tax cuts) and deregulation remains our baseline guide to risk positioning.
• The stock market or approval ratings will likely eventually discipline POTUS and trigger deals.
• The bond market looks past deepening fiscal deficits and unfunded tax cuts.
• U.S. monetary policy leaning slightly toward the incrementally more dovish side of the ledger.
• Fiscal stimulus and structural reform may boost growth in Europe, Germany in particular.
• Constructive fundamentals (growth and earnings) ultimately drive markets and remain sound.
• AI efficiencies are in the early innings of impacting productivity, inflation, and growth.

Cautious Asset Allocation Narratives

• Oversold conditions are mounting in U.S. equity markets but not yet at capitulation levels.
• A continuation of adverse trade policy into the summer would accelerate deterioration in sentiment and economic growth, representing a key risk to markets and the overall economy.
• Higher bond yields and tighter financial conditions in Europe pose risks to debt sustainability.

Weekly Market Report: March 14th, 2025

Market Anecdotes

• Inflation and growth impacts of tariff policies are key concerns for corporations and markets. While recession calls are growing (again), a more convincing widening of credit spreads, fall in corporate earnings, and rally in treasury markets is needed for us to join the call.
• Policy uncertainty continued last week with a barrage of POTUS announcements, roiling stock markets and taking effective tariff rates near 1930’s era Smoot-Hawley levels.
• Productive meetings between Canada and U.S. trade representatives happened on Thursday, moving both sides closer to striking a compromise.
• Economic reports on inflation, jobs, and sentiment last week included soft inflation, slowing labor markets, and deteriorating business/consumer sentiment.
• Lower oil prices, due to reduced growth expectations and increased supply will act as a tax cut to consumers and deflationary to the overall economy. The stock market would certainly applaud the former but not the latter.
• Chinese stocks staged a nice rally last week on a NFRA pledge to focus on stimulating consumer demand.
• 2025 has seen the worst USD performance since 2008, down over 3%, due to a combination of moderating growth outlooks, tariff policies, and narrowing sovereign interest rate spreads.

Constructive Asset Allocation Narratives

• Fundamentals (growth and earnings) ultimately drive markets and remain sound. 
• The stock market or approval ratings will likely eventually discipline POTUS and trigger a flip from “spinach” to “candy”.
• U.S. tax cuts will help offset the growth/economic headwinds from tariffs.
• The bond market looks past deepening fiscal deficits and unfunded tax cuts.
• U.S. monetary policy leaning slightly toward the incrementally more dovish side of the ledger.
• Fiscal stimulus and structural reform may boost growth in Europe, Germany in particular.
• AI utilization may translate to material gains in global productivity and lower prices.

Cautious Asset Allocation Narratives

• Oversold conditions are mounting in U.S. equity markets but not yet at capitulation levels.
• A continuation of adverse trade policy into the summer would accelerate deterioration in sentiment and economic growth, representing a key risk to markets and the overall economy.
• Higher bond yields and tighter financial conditions in Europe pose risks to debt sustainability.