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.

Weekly Market Report: March 7th, 2025

Last week markets took in a healthy dose of policy uncertainty with on and off again tariff news driving risk appetite while most economic reports came in largely as expected. Dovish leaning narratives from Fed policy makers managed to calm markets slightly but U.S. equity markets closed the week down 3.1% while developed international (+2.4%) and emerging markets (+2.9%) both managed healthy gains thanks in large part to a notable 3.5% decline in the USD. Bonds didn’t fare much better as interest rates ticked slightly higher and the yield curve steepened leaving the 10yr UST yield at 4.32% while credit spreads widened again marginally on the week, from 287 to 299.

Market Anecdotes

• Markets are in the process of absorbing material changes in trade policy and a rare attempt at addressing the size and scope of government, both resulting in a dense pack of policy fog.
• The chaotic trade war on Canada, Mexico, and China was a key driver behind markets last week resulting in a fall in equity markets and a rally in bond markets – two markets that clearly remember the economic impact of 1930’s era Smoot Hawley Tariff Act.
• Last week’s jobs report revealed solid job creation, a slight and unexpected uptick in unemployment to 4.1%, and a decrease in federal workers but not to the extent expected in the March jobs numbers.
• Germany’s response to U.S. policies is gaining market attention with a lift of the debt brake and budget plans to spend $500b on defense alone plus significant infrastructure spending.
• The NPC meeting last week set China’s economic growth target at “around 5%” and fiscal stimulus measures
  that met market expectations of an increase but not substantially enough to meaningfully accelerate economic activity.
• The FOMC gave a dovish nod toward softening labor markets and inflation dynamics as potentially leading to easing policy but also the need for more clarity on fiscal/trade policy impacts on both. Powell also downplayed recent sentiment and inflation expectation surveys.
• The ECB met market expectations with a 25bp rate cut to take refi and deposit rates to 2.65% and 2.5% respectively

Asset Allocation Narrative

Oversold conditions are mounting in U.S. equity markets but not yet at capitulation levels. Continuation of strong fundamentals and a flip from “spinach” to “candy” from the FOMC or Pennsylvania Avenue should, at some point, get things back on track toward a constructive intermediate term view on risk assets. An exogenous shock or increasing consumer/business sentiment impacting spending remain key risks to our constructive intermediate outlook on equity markets.

Weekly Market Report: February 28th, 2025

Market Anecdotes

• Positive short-term stock/bond yield correlations and interest rate call/put skew are suggesting markets at this point are more concerned with tariffs and growth than fiscal imbalances. However, a recession in the U.S. remains a non-consensus call.
• A rally on the long end of the yield curve pushed the 3mo/10yr slope back into inversion last week as markets traded on a slowing growth narrative with an implicit message to the Fed that some easing might be warranted but emerging tariff price pressures may complicate things.
• Fourth quarter earnings season is now largely complete. Highlights include very firm 17.8% earnings growth (led by financials), historically average beat rates and margins, more than usual downward guidance, and the runaway hot topic was tariff policies.
• The U.S. tariff reprieve on Canada and Mexico following concessions earlier this month were back in the headlines last week with POTUS indicating 25% on the former and 10% on China may be coming this week. Markets and businesses remain unclear on specific details at this time.
• U.S. debt/GDP, up from 76% in 2017 to 100% today, are projected to increase to 126% by 2034, highlighting a serious problem in need of serious solutions which the proposed budget seems to fall short, even with aggressive assumptions. Bond markets seem fine but are watching.
• The HOR budget resolution bill is projected to add $2.8t to the deficit by 2034 with Senate modifications (higher tax cuts, reduced spending cuts) taking that figure to -$3.5t.
• A remarkable shift in U.S. foreign policy took shape last week with Ukraine walking away from a U.S. negotiated surrender of territory, a rare earth minerals deal, and emerging mobilization of European nations.
• BCA suggested recent leadership in European equities is driven primarily by near term economic surprises and cheap valuations rather than earnings or growth fundamentals but foreign policy developments and the debt that comes along with them may also be a factor.

Economic Release Highlights

• January Headline and core PCE grew 0.3% MoM in January with YoY readings of 2.5% and 2.6% respectively, both generally in line with estimates.
• Personal Income grew more than expected in January (0.9% vs 0.3%), following 0.4% growth in December and MoM PCE contracted by 0.2%, more than the 0.2% growth expected.
• Consumer Confidence fell from 104.1 to 98.3 in February, below the spot consensus 103 and the forecast range of 100 to 104.5.
• Durable Goods Orders jumped 3.1% in January, well above consensus of 1.9% and toward the high end of the range. Core Capital Goods grew 0.8%,well ahead of the 0.5% spot consensus.
• New Home Sales in January of 657k was in line with the consensus range of 630k to 705k. Pending Home Sales Index fell 4.6%, below the forecast of -1.2% and consensus range of -3.3% to 2.4%.
• The Case-Shiller Home Price Index came in at forecast, up 0.5% MoM in December and 4.5% YoY