Tariff Turmoil

In our April 2024 Quarterly Market Strategy Report we wrote “if the stock market is forming a bubble, and we think it is, it is still in the early stages. PE multiples are exceedingly high at 24.2 times trailing 12-months and 21 times forward 12-months earnings. Yet during the 1997-2000 bubble, the financial crisis of 2008, and even the post-COVID-19 peak, the trailing 12-month PE reached 26 to 30 times.”

We mention these comments from a year ago because the world seems to have changed so much in the two months since Donald J. Trump became president. But given these comments from a year ago, Trump’s tariff threats and the uncertainty they created may have been the trigger the market required for an inevitable correction. In short, a pullback in the market was overdue, and the uncertainties surrounding tariffs were the catalyst. As we expected, the equity market continued to rise last year and by February 19, 2025, the S&P 500 was trading at 26 times trailing earnings and 22 times forward 12-month earnings. This forward PE of 22 in February was well in excess of the long-term average of 14.3 times. In short, from a valuation perspective, it is not a surprise that the equity market had one of its weakest first quarter performances in years.

Testing the Lows

At the March 13, 2025 closing lows, the peak-to-trough declines in the S&P 500, Dow Jones Industrial Average, the Nasdaq Composite index, and the Russell 2000 index were 10.1%, 9.3%, 14.2%, and 18.4%, respectively. This means that the S&P 500’s selloff was just short of a 10% drop that defines a correction, and the Russell 2000 declined just short of the 20% drop that defines a bear market. Yet, many of the technology stocks that had been the drivers of the 2024 bull market fared much worse. For example, Nvidia Corp. (NVDA – $108.38) had a two-month peak-to-trough decline of more than 28%. In other words, depending upon the index or stock you choose, equities have been in full-blown correction or bear market in the last two months. By the end of March, the declines of 4.6% in the S&P 500 and 10.4% in the Nasdaq Composite index in the first quarter were the worst since 2022.

As the April 2 deadline for President Trump’s tariffs approaches, the equity market is retesting its March lows. From a technical perspective, a retest of the lows is a normal scenario and part of a classic bottoming process. There are several factors that suggest a bottoming process is at hand. The S&P 500 seems to be stabilizing after it experienced a 10% correction, the Nasdaq Composite index rebounded off its 2022-2025 uptrend line and the Russell 2000 index bounced off its pivotal 2000 resistance/support level. These were all important levels of support. Rebounds from these levels make it likely that the worst of the “fear of tariffs” may be over. In addition, the American Association of Individual Investors’ survey showed that bullish investor sentiment tumbled to 19.4% and bearishness jumped to 60.6% at the end of February. A combination of 20% or less bullishness and 50% or more bearishness in this indicator is rare and has been a positive sign for the market. The 8-week AAII bull/bear index is as low as it was in November 2022, just after the S&P 500’s 25% decline to 3577.03 on October 12. In short, this high level of pessimism is associated with major market lows.

The Impact of Tariffs

What history has shown is that financial markets can deal with good news or bad news, but it does not do well in a time of uncertainty. With the 25% tariff on foreign car imports now permanent and the April 2 deadline for reciprocal tariffs on the horizon, the fog of uncertainty regarding tariffs should soon begin to dissipate. That is good news.

Most economists are describing tariffs as a tax on consumers, but we disagree. Taxes of all kinds are unavoidable, and they are mandatory. Tariffs make imports more expensive, but consumers usually have choices in terms of what they buy or do not buy. In the case of vehicles, American-made vehicles will be a more attractive alternative in the future, and we expect to see consumers buying more American-made and less foreign-made vehicles. The same is true of liquor, wine, and many other products. More importantly, despite what many economists are saying, history has shown that tariffs are rarely passed on directly to the US consumer. In the past when tariffs have been levied, exporters often choose to lower prices, or in the case of China, a country can subsidize exports to the US. Domestic retailers can choose to absorb part, or all of the tariff increase in order to keep prices stable for consumers. This means that inflation may be far less than expected, but many companies that import products or parts from offshore will face margin pressure. From this perspective, the biggest negative from tariffs could be lower margins and lower corporate earnings.

If tariffs persist for a long while (and there is no certainty that they will), we expect consumer behavior will change; consequently, in the aftermath of tariffs, some companies will be winners and some will be losers. But keep in mind that the April 2 “Liberation Day” tariffs will be excluding a variety of necessities such as semiconductors and pharmaceuticals, and as a result, the overall impact will be less broad based than currently forecasted.

It is also important to remember that the US is the largest consumer in the world with a 2024 trade deficit in goods and services of $918.4 billion. The deficit in goods alone reached a record $1.2 trillion in 2024. Our largest trade deficit was with Mexico, and it hit a record $171.8 billion last year. The US had record imports from 50 countries in 2024, led by Mexico ($505.9 billion), Germany ($160.4 billion), and Japan ($148.2 billion). This trilogy of imports may explain Trump’s focus on imported vehicles. Conversely, the 2024 petroleum surplus was the highest on record at $44.9 billion.

Overall, these statistics explain why the threat of tariffs is a powerful negotiating tool for the US. And despite the current anguish about tariffs, if the tariffs become permanent (which we doubt), the negative impact on our trading partners is apt to be far greater than it will be domestically. Therefore, in our view, our trading partners are more likely to sit at the negotiating table and look for a compromise, than to start a true tariff war.

Sentiment Bias

In this highly politicized environment, it is worth discussing the bias currently found in consumer sentiment indices. The recent University of Michigan consumer sentiment for March fell 7 points to 57. The current conditions component eased 1.9 points to 63.8, and the index of consumer expectations plummeted 11.4 points to 52.6. Nevertheless, these numbers appear to be highly skewed by political party affiliation. Party affiliation data has a one-month lag, but the index of consumer expectations for Democrats fell 12.6 points to 36.8 in February while Independent expectations dropped 6.4 points to 59.1. Conversely, the Republican expectations index rose 2.3 points to 106.6. This data suggests that consumer sentiment data is skewed politically and has a negative bias.

The University of Michigan survey also reveals that optimism, or pessimism may be highly correlated to the news source one chooses to follow. When respondents were asked “during the last few months, have you heard of any favorable or unfavorable changes in business conditions?” the 3-month moving average of Democrats fell 40 points to 29 while the same index rose 13 points to 101 for Republicans. Independent voters had a 9-point decline to 53. This bias in sentiment indices suggests that much like presidential election polls, consumer sentiment indicators may not be a good forecaster of outcomes.

All in all, retail sales may be a better predictor of the health and sentiment of the consumer than sentiment indices. Many indicators point to the market being in a bottoming formation in March and that implies an opportunity for investors. However, individual companies may be helped or hurt by tariffs. This means keeping portfolios diversified and avoiding companies that could face potential margin compression in the year ahead.  

*Stock prices are as of March 31, 2025 close.

Gail Dudack, Chief Strategist

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You Can’t Always Get What You Want

DJIA: 42,299

You can’t always get what you want… but if you try, you just might find you get what you need. We don’t usually think of the Rolling Stones at a time like this, but we pretty much agree with the concept here.  The 10% correction didn’t end in much of a washout, so the numbers a week or so ago didn’t exactly match those of prior lows.  Stocks above their 200-day only fell to 32% versus a preferred level of 20% or less, and the VIX or fear index as it is called, barely budged. Yet there seemed considerable fear. The Investors Intelligence survey recently showed more bears than bulls, the first negative reading in a year. When mildly negative as it is now, annualized returns are quite positive. Then, too, you might say this is a survey of market letter writers and what do they know? We couldn’t agree more.

Surveys like investors intelligence never have been our favorite measure of sentiment or investor psychology. Sentiment itself is never a timing tool, but when it comes to sentiment, we prefer what investors or traders are actually doing, rather than just what they say they are saying.  In almost any social gathering people might say they are bearish, ask if they own stocks and they invariably say yes. That is not being bearish.   Put buying, the Put/Call ratios are useful as a measure of sentiment, though Put buying can be just a hedge. Equity only P/Cs, however, have done an excellent job over the last year.   They are now at their highest level over that span. Over time we have noticed some indicators work in some markets and not others, and vice versa. An Interesting point here, everyone looks at the VIX, few at the equity only P/Cs.

They say 5 will get you 10, in this case 10 may yet get you 20. If the 10% drawdown is about to morph into 20%, it should be happening soon.  Meanwhile 10% only declines don’t look back.  If 10% was it, how far can the rally carry? Recognizing turning points is one thing, how far they may go is quite another. Robert Prechter was good at it, the rest of us not so much, not that most don’t try. We find the answer is always when things change – a peak in stocks above their 200-day, a low level in the VIX and disappearing put buying. Where this recovery ends is hard to say, when is about the indicators. Part of it, too, of course, is about the average stock, the advance/decline numbers. Even if it is no longer the leadership, you don’t want to see Tech falling as it did Wednesday.

Although there was not a washout sort of low, arguably many Techs came close. Typically, at market lows those down the most turn up the most, simply by virtue of a rubber band sort of effect. Tech hasn’t fared too well since then, leaving their leadership somewhat in doubt. Leaders or not their participation is important – a house divided, and all that. Meanwhile, what you might call retro tech names like IBM (246) and Cisco (61) have held together well, as have names like McDonald’s (313), Fastenal (78) and GE (206). Most find insurance stocks boring, which is to say making money is boring – IAK (137) is the ETF there. Precious metals have good reasons to rally, energy not so much.  Don’t tell that to Chevron (167) and Exxon (118).

Market lows are made when the selling is out of the way. Wednesday didn’t exactly have that look, Thursday was a bit better to damn with faint praise. These are only two days of course, and we’re still well above the recent lows. This seems important since if we fall back again to the 10% correction level, the next 10% could come quickly. We are surprised and disappointed that the market continues to react to tariff news. Good markets don’t typically keep discounting the same bad news. How the market reacts to the likely bad news this weekend could be insightful. When Russia actually invaded Ukraine, the market rallied, the bad news has been priced in. Much like then, a rally on bad news would be a positive change.

Frank D. Gretz

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US Strategy Weekly: Has Bearishness Run its Course?

Ironically, as President Trump’s April 2 target date for implementing tariffs approaches, investors are beginning to understand Trump’s negotiating process, and the fear of a tariff war appears to be subsiding. In sum, tariffs may, or may not, be implemented; it depends upon the flexibility of the export country, but if this were a card game, the US already has a better hand. At least for the moment, equity prices seem to be stabilizing.

It is not a surprise, and should not go unnoticed, that officials from both the European Union and India are meeting with US trade officials this week to avoid steep tariffs next week. This has been the goal – to get our trading partners to the negotiating table in earnest. According to Reuters, India is open to cutting tariffs on more than half of US imports worth $23 billion in the first phase of a trade deal that the two nations are negotiating. It should not be a surprise that the overwhelming angst regarding tariffs since President Trump came into office has been exaggerated and misplaced. The real fear regarding the strength of the US economy in 2025 should be on how the economy will fare once the massive fiscal stimulus implemented throughout the four-year Biden administration disappears. This has been our worry; because as fiscal stimulus has been fading, consumption has already been weakening, and 70% of US GDP is driven by the consumer. There is a potential counterbalance; but the question is whether or not Congress can, or will, soon pass a comprehensive tax reform bill that will help support the average household by lowering taxes. Republicans are quickly discovering that a slim majority in both houses of Congress does not guarantee success in passing legislation. Therefore, there is risk to the consumer and to the economy this year.

Another, but longer term concern we have is the recent disclosure that a sophisticated Chinese network is trying to recruit newly fired, and we assume angry and disenfranchised, federal employees. Max Lesser, a senior analyst for emerging threats at the Washington-based think tank Foundation for Defense of Democracies, said some companies placing recruitment ads were “part of a broader network of fake consulting and headhunting firms targeting former government employees and AI researchers.” Lesser uncovered the network and shared his research with Reuters ahead of his publication. He said the campaign follows “well-established” techniques used by previous Chinese intelligence operations. This type of recruitment is not really new; however, in the current Washington DC political environment that is steeped in partisan anger and cynicism, these fired workers and the US in general, could become particularly vulnerable to Chinese espionage.

The S&P 500 is down 8% from its recent peak, down 1.8% year-to-date, and is currently on track for its first quarterly loss since June 2023. However, a correction was long overdue. Moody’s rating agency reported that the United States’ fiscal health deteriorated since it last lowered its outlook on the AAA rating in November 2023, and the US is on track for a continued multiyear decline as budget deficits widen and debt becomes less affordable. Federal debt has been our major concern for 2025. Meanwhile, more dismal news came from consumer confidence surveys.

The Conference Board’s consumer confidence index made headlines because it fell from a revised 101.1 (previously 98.3) in February to 92.9 in March, its lowest reading since January 2021. The present situation index also declined, but remains well above its long-term average. The story was in the expectations index which fell 9.6 points to 65.2, its lowest reading in 12 years. See page 7. But note that the Conference Board has been systematically revising previous monthly readings higher. More importantly, as we noted last week when analyzing the University of Michigan survey, sentiment is swayed by political bias and in the current environment by Democratic pessimism. This suggests that much like the bias seen in past presidential-election polls, sentiment indices may not be a reliable predictor of economic outcomes. In our view, retail sales are the better benchmark for measuring consumer strength or weakness. Note that March retail sales data will be released on April 16.

Housing data for February was mixed but continues to show weakness. Seasonally adjusted existing home sales were 4.26 million (SAAR) in February, down 1.2% YOY; however, this was the first YOY decline in five months. Seasonally adjusted new home sales were 676,000 in February, up 5.1% YOY, after being unchanged in January. The median price of an existing single-family home was $402,500, up 3.7%, but rising at a decelerating pace. The median price of a new single-family home was $414,500, down 1.5% YOY, continuing the slow decline seen for most of the last two years. See page 3. The discrepancy between existing and new home price trends has existed since the second half of 2023 and the weakness in new construction may be a result of higher prices and excess capacity. Over the last 50 years existing home prices and retail sales have been highly correlated, so it is encouraging that both existing home prices and retail sales have remained positive and stable. See page 4. Again, upcoming retail sales reports will be an important barometer of consumer strength.

The NAHB single-family housing market index has been declining since the end of March 2024; but the good news is that housing affordability is slowly improving as incomes rise and home prices ease. The index of median existing home prices versus personal income per capita has dropped from “expensive” to “normal” in recent months. Unfortunately, the median home price relative to median household income remains in the “expensive” range which suggests that mid-range housing prices may decline further in coming quarters. See page 5.

One positive for the real estate market is that the Federal Reserves’ newly revised household debt service ratios show the mortgage debt service ratio has stayed low, stable, and healthy over the last 18 months. In the fourth quarter of 2024, the mortgage debt ratio dipped from 5.83% to 5.77%. Conversely, the consumer debt service ratio rose from 5.48% to 5.51%, and is up from a pandemic low of 4.31% in 1Q21. See page 6. Recent consumer credit card data suggest this ratio continued to move higher in the first quarter of this year.

At the March 13, 2025 lows, the peak to trough declines in the S&P 500, Dow Jones Industrial Average, the Nasdaq Composite index, and the Russell 2000 index were 10.1%, 9.3%, 14.2%, and 18.4%, respectively. Not only did the S&P 500 appear to stabilize after a 10% correction, but the Nasdaq Composite index rebounded off its 2022-2025 uptrend line and the Russell 2000 index bounced off its pivotal 2000 resistance/support level. These were all important levels of support, and the bounce off these levels makes it likely that the “fear of tariffs” decline has run its course. However, most market lows are retested and this low may be no exception. See page 10. The 25-day up/down volume oscillator is at minus 0.59 this week, neutral, and relatively unchanged for the week. However, it was significant that the equity market rallied after this indicator reached a level of negative 1.84 on March 13, its lowest level since the market weakness seen in December/January. And finally, last week’s AAII survey showed bull/bear percentages of 21.6%/58.1%. These numbers continue to exceed the bull/bear split of 20/50 which is rare and favorable. The AAII 8-week bull/bear index is minus 23.6% and the most positive since November 2022. All in all, the technical backdrop of the equity market suggests bearishness has run its course.

Gail Dudack

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If They Don’t Go Down, Likely Will Go Up

DJIA: 41,953

If they don’t go down … it’s likely they will go up. Actually, that’s a bit more profound than it would seem. A 10% correction was in place last Thursday, the technical backdrop for a turn was not. Stocks above their 200-day average on the NYSE had only reached 32%, versus a more significant level of 20%. As we all know, life in the stock market isn’t about perfection, sometimes you get what you need. One plus we haven’t looked for was a spike in the equity only P/Cs to a level in keeping with that of recent previous turning points. So, will 10% do it, or did 10% start it? In the most simple terms, both the 10% only and 10% plus lows have sharp initial rebounds. The 10% only corrections pretty much don’t look back. The 10% plus corrections give up their gains relatively quickly.

If at their start both the good and bad rallies look similar, there’s little to distinguish them other than their longevity. However, there may be a couple of things worth noting. Last Thursday’s selloff marked a 10% decline in the S&P, as well as a five-month low.  It was followed by a 2% rally on Friday, a specific pattern that has in the past led to higher prices. A more subjective positive of late has been the trading in stocks like IBM (243), McDonald’s (307), GE (204) and Deere (477). Certainly a diverse group, and not the Tech names like Nvidia (119) where most of the focus lies. The former, however, are important stocks which could lead as Tech continues to struggle. The patterns here are a bit strange in that they spiked up recently only to give up the strength in last week’s selloff. Then, too, the strong stocks usually get hit at the end of declines.

Aside from the stocks above, other areas that look attractive include Insurance, companies in our experience that find a way of turning pain, including their own, into gain. Then, too, Insurance stocks are not exactly Nvidia. You’re not going to go to your friends bragging about your Insurance stocks – maybe AJ Gallagher (335) if they’re Irish.  Sometimes you just have to ask yourself, do you want to be cool or do you want to make money?  The short-term patterns are fine, and the pull back Wednesday in Progressive (275) leaves them a little less stretched. For those with an investment versus a short-term perspective, the monthly charts are what we call sleep at night patterns. These are the sort of patterns where you not only don’t fear weakness, if you have cash you hope for it.

Then there is Gold.  Up a lot you might say, but that’s what they said about every big move half the way up. In this case, despite Gold’s stellar performance, the Gold/SPX ratio is once again just crossing an esoteric moving average which in the past has led to higher prices still.  And then there’s China, until just recently termed uninvestable – a term worthy of a Business Week cover. The bear market there seems over, Tech is no longer the political bad guy, DeepSeek and instant battery charging have renewed attention. Most important here seems the washout, as per our proposed cover story. And money seems leaking out of the US for now, for better performance elsewhere including China. Tariffs somehow seem more of a worry for us than for them.

As usual, there are a few possible outcomes here. One not much thought of is a decent recovery, but one without Tech. Speaking on behalf of the charts, this seems a real possibility. You can summon the witches of the deep, but we’ve noticed they don’t always respond. Perhaps Nvidia and the rest of Tech have stopped going down, but could fail to respond, at least as leaders. To the fore could be the stocks outlined above, or stranger still, have you looked at Exxon (116) or Chevron (165) lately?  As for the market, it’s a case of time will tell. Important again is the average stock, daily advancing versus declining issues. The pattern is almost surprisingly good in that there are bad days, but no bad up days – up in the Averages with poor A/Ds. We wouldn’t want to see that change.

Frank D. Gretz

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US Strategy Weekly: Sentiment Swoons

This week marks the Federal Reserve’s second FOMC meeting of the year and it is one of the few meetings that will include a summary of the Federal Reserve Board’s economic projections. Economists will be analyzing these predictions for clues regarding future monetary policy changes and looking to see if the dot-plot has been amended — particularly since fed fund futures are now predicting a 55% chance of a rate cut by June and a 40% probability of two rate cuts by September. This shift from no rate changes this year to two or three rate cuts was triggered by several items, but particularly the Atlanta Federal Reserve’s GDPNow forecast. Two weeks ago, this indicator plummeted from an estimate for first quarter GDP growth of 2.3% to a decline of 2.8%. At present, this forecast has improved a bit to a decline of 1.8%; however, the suggestion of recessionary weakness in the first quarter triggered Fed watchers to pivot toward rate cuts this year.

Note that rate cuts are counter to the expectations that tariffs, and the possibility of a tariff war, will be inflationary in 2025. Nevertheless, February’s inflation data pointed to a marked deceleration in nearly all benchmarks. Even import prices were seen to be rising at a comforting pace of 2.0% YOY. However, import prices will be a closely monitored economic statistic in coming months.

Headline CPI for February was better than expected at 2.8% YOY, down from 3.0% in January. Core CPI eased 0.2% to 3.1% YOY. Service sector inflation was 4.1% YOY, down from 4.2% in January and owners’ equivalent rent was 4.4% YOY, down from 4.6%. In conclusion, all the major price trends improved in February. See page 3.

What made February’s inflation release important was that it showed a reversal of the acceleration seen in most core inflation indices. For example, the various core indices that exclude shelter, food, energy, medical care, and used cars & trucks were all lower in the month. Even problem areas such as health insurance and motor vehicle maintenance & repair saw prices trending lower in February. One holdout was the “other goods and services” index which reverted to December’s 3.3% YOY pace after falling to 2.4% YOY in January. See page 4. With the exception of egg prices, most inflation indices showed inflation was decelerating. In fact, there were many areas in the report such as information technology, hardware and services, gasoline and fuel oil, fruits and vegetables, and airline fares that showed prices were falling on a year-over-year basis.

But business and consumer sentiment has been plummeting, and much of this is due to uncertainty related to tariffs and inflation. The NFIB Small Business Optimism Index fell 2.1 points in February to 100.7, its fourth consecutive month above the 51-year average of 98, but 4.4 points below its December peak of 105.1. Of the ten components in the index, one was unchanged, three were higher, and seven were lower. Sales expectations were lower in February, but job openings rose. The NFIB Uncertainty Index rose 4 points to 104, its second highest reading on record. Small business owners have experienced uncertainty whiplash in recent months with the Uncertainty Index falling from October’s 110 reading to 86 in December and then back up to 104. See page 5.

Consumer confidence indices also tumbled. The headline Conference Board consumer confidence index fell 7 points to 98.3 in February and the University of Michigan consumer sentiment index dropped 9.8 points to 57.9 in March. Expectations were the main source of weakness in both surveys; however, the University of Michigan, which also releases data based upon income, age, and political affiliation, showed that consumer sentiment was significantly swayed by political bias. In the five months since October, the University of Michigan survey shows Democrat expectations plunged from 93.1 to 49.4, while Republican expectations soared from 61.4 to 104.3. See page 6. This dichotomy suggests that much like the bias seen in recent presidential-election polls, sentiment indices may not be reliable in predicting economic outcomes.

After a sizeable drop in January, seasonally adjusted retail sales grew in February, albeit at a below consensus pace. Total retail and food services sales rose 3.1% YOY after the 3.9% YOY gain seen in January. But after adjusting for inflation, retail sales grew a modest 0.3% YOY versus the 0.9% seen in January. Christmas and back to school buying tends to result in retail sales declining in January, February, and September, which is why economists tend to look at seasonally adjusted data. However, this February’s unadjusted sales were down 0.9% YOY, implying that February 2025 was slightly weaker than normal. Since weak consumer sentiment and sluggish retail sales are a poor combination, this means the March retail sales release will be important. It could be helpful in determining whether consumption (i.e., GDP) is seriously weakening in the first quarter. See page 7.

The Bureau of Economic Analysis’s second estimate for fourth quarter GDP was 2.3%, which was a deceleration from the third quarter’s 3.1% growth. However, inventory destocking was a drag during the fourth quarter, and this could reverse in the first quarter. Economic growth in the first quarter of 2025 will be important for many reasons, but we would point out one disturbing fundamental benchmark. Total market capitalization to GDP touched its June 2021 record peak at the end of 2024. This implies that equity valuations were extremely rich at the end of 2024 and were discounting a substantial amount of future earnings. This helps to explain the recent market weakness. But it also underscores why March retail sales may be an important bellwether for the economy, corporate earnings, and the equity market. See page 8.

The housing market has been decelerating for several months, and recent data releases indicate that this continues. The National Association of Home Builders confidence survey was sluggish in March and the headline index fell from 42 to 39, current sales dropped from 46 to 43, and traffic of potential buyers declined from 29 to 24. However, 6-month sales expectations were unchanged at 47. In line with weakening builders’ confidence were residential construction statistics for February which showed permits falling 6.8% YOY and housing starts down 2.9% YOY. Single-family statistics were slightly better with permits falling 3.4% YOY and housing starts dropping 2.3% YOY. In short, the residential housing market continued to slow in the first quarter of the year. See page 9.

In terms of the equity market keep in mind that perpendicular moves tend to be driven by sentiment, not fundamentals. History shows that they tend to be countertrends to the major move. In the current market environment, we would also note that many of the popular indices are at interesting round numbers, which may serve as support. In particular, the S&P 500 is trading near 5500 and the Russell 2000 index is trading close to the key 2000 support level. These levels could be pivotal given that the market has already undergone a “correction” or a bear market depending upon which index one chooses. At the recent March 13, 2025 low, the decline in the S&P 500, the Dow Jones Industrial Average, the Nasdaq Composite index and the Russell 2000 index were 10.1%, 9.3%, 14.2%, and 18.4%, respectively. See page 12. And on a positive note, the 12-month forward PE multiple for the S&P 500 is currently 18.3 times earnings. This is approaching the 20-year average PE of 18.8 times and falling toward the long-term average PE of 17.8 times. See page 10. In short, valuation is improving.

Gail Dudack

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It’s Not About Where or When

This week there will be no regular market letter.  Instead, please find a few thoughts from Frank on the recent action.

It’s not about where or when … it’s about the selling. Sellers, not buyers make lows. The selling is done, not based on the misused term oversold, but when markets are sold out. The percentage of stocks above their 200-day moving average is an indicator with a long history. Over time it has consistently fluctuated between 70% or more at market peaks, to 20% or less at market lows.  Just below 40% earlier this week, it’s hard to call this market sold out. This also seems unlikely based on the lack of a spike in the VIX, which would have indicated a give-up sort of phase. Meanwhile, the S&P is approaching the garden variety correction number of 10%, and the average S&P stock is down 20% – tech stocks of course much more. There was little special in Wednesday’s market numbers, and no follow through Thursday. Still, even bear markets have their counter trend respites.

It’s important to remember stocks are not companies, and what affects stocks often has nothing to do with those companies. We are thinking here of a company like Netflix (890), seemingly doing well and importantly these days, one untouched by the political drama of tariffs.  Yet the stock is off some 15% from its peak and broke the 50-day just this week. Part of the problem is that it’s a weak market, and studies suggest 70-80% of the movement in any stock is a function of the overall market trend. Often more important these days are the ETFs which concentrate on areas like AI, the MAG 7 and in this case FANG stocks. When one of these ETFs is bought or sold, each stock is affected regardless of the company’s merits, good or bad. This was all well and good on the way up, not so good now.

Frank Gretz

US Strategy Weekly: When Emotions Run High

The S&P 500 is down 5.26% year-to-date and is currently 9.3% below its all-time high. More importantly, this 9.3% decline took place in just the last 14 trading sessions. But the real carnage has taken place in the Nasdaq Composite index, which is now 13.6% below its record high level and the Russell 2000 index, which has fallen 17.1% from its record peak. In short, the S&P 500 may be slightly short of the 10% correction level, but many stocks, particularly in the small capitalization and technology sectors, have experienced a full bear market in the last two months. This is the bad news. The good news is that perpendicular moves in the equity indices tend to be counter to the major trend. Dramatic moves reflect emotion, either fear or greed, and are rarely the beginning of a new trend. This should be some consolation for investors.

The other bit of good news is that the stock market appears to be discounting a recession, which may or may not occur. At the moment there is no real evidence that a recession is ahead, although there are a few warnings which we will discuss this week. The catalyst for this week’s bloodbath is entirely President Trump, who first shied away from negating the prospect of a recession and then shocked global investors by threatening to place 50% tariffs on Canadian goods. All in all, this meant that there is no way to predict what President Trump’s next move might be and this rising uncertainty drove investors to the exits.

Without the need or ability to run for another four-year term, President Trump, appears to be playing hardball both domestically and internationally to fix a myriad of problems such as runaway fiscal deficits, bureaucracies with no oversight, unfair trade practices, and wars in Europe and the Middle East. None of these problems are easy to fix and they are all serious. But after only 50 days in office, Trump seems to be making progress on many of these issues, but not without creating an uproar in Washington DC and Europe!

Technically Speaking

The key market index to monitor in our view is the Russell 2000 index, which has dropped back to the 2000 level. This level was resistance throughout 2022-2023 and part of 2024 and should now act as support on the downside. Failure to hold at the 2000 level would be a warning that a recession may be a real concern. See page 12.

The 25-day up/down volume oscillator is at minus 0.87 this week, neutral, and surprisingly up for the week. This is shocking in many ways, but our oscillator only uses NYSE volume versus composite volume in order to try to eliminate the noise from program and algorithmic trading that now dominates daily composite volume. Automated trading techniques rely on volatility but do not reflect the conviction of investors. Our indicator looks to measure the conviction behind price moves. Twice this year this oscillator rose close to an overbought reading of 3.0 or greater but failed to confirm the rally earlier this year. Now we expect the market to bottom out before recording a long or deep oversold condition, in keeping with a long-term bull market cycle. See page 13.

Last week’s AAII survey showed bullishness fell 0.1% to 19.3% and bearishness fell 3.5% to 57.1%. Bullishness is below average for the eighth time in 10 weeks, was last lower on March 16, 2023, and was among the lowest 66 readings in the survey’s history. Bearishness is above average for the 14th time in 16 weeks. These numbers now exceed the bull/bear split of 20/50 which is rare and favorable. The 8-week bull/bear is minus 14.1% and the most positive since March/April of 2023. Again, bear markets rarely begin with this level of skepticism. See page 15. The 10-day average of daily new highs fell to 94 this week and new lows are averaging 128. This combination of daily new highs below 100 and new lows above 100 is a change that turns this indicator from neutral to negative and is the only real negative in our collection of indicators. See page 14.

Liquidity is what drives bull markets, and even though the Federal Reserve’s quantitative tightening continues, liquid deposits at commercial banks continue to rise. Both demand deposits and retail money market funds reached record highs recently and total liquid assets in the financial system equal $19.3 trillion, close to the record $19.88 trillion seen in April 2022 during the post-pandemic fiscal stimulus. Cash is currently 34% of total estimated market capitalization of $57.2 trillion – not a record, but a healthy level. In short, fear is generating selling at the moment, but there is plenty of cash on the sidelines once the fear dissipates. See page 9. 

An Economic Mix

The increase of 151,000 new jobs in February and the small rise in the unemployment rate from 4.0% to 4.1% was reassuring, particularly with the increase in recession fear. Our favorite employment benchmark measures the year-over-year change in total employment in both the establishment and household surveys. Both indices indicated growth in jobs in February that was slightly below their long-term averages, but still solid and improving. In our view, this was one of the best features of the February report. See page 3. But there were quirks in the February report including the sharp increase in U-6 unemployment rate, which jumped a full percentage point to 8.5%. There was also a 393,000 increase in multiple job holders, indicating that multiple job holders represent 5.6% of total employment, the highest since 5.7% in October 2004. However, this was not a record percentage when compared to total employment. Still, these two statistics may be signs of rising stress in the job market. Nevertheless, the Misery Index (the sum of inflation and unemployment) sits at 7.1% and is comfortably in the neutral zone of 5.8% to 12.6%. See page 5.

Earnings were a bright spot in the February report and average hourly earnings rose $0.09 to $30.89, reflecting a 4.1% YOY increase. Real hourly earnings rose 1.1% YOY in February, down from the recent 1.7% YOY peak seen in September 2024, but still showing real growth in earnings and purchasing power. See page 6.

Consumer credit has been on our radar for months and total credit expanded $18.1 billion in January. But the real story was that December’s previously reported $48 billion growth in credit was dramatically revised to a $100 billion contraction. Discontinuities in source data explain much of this adjustment; however, inflation-adjusted nonrevolving credit per capita has been decelerating since 2021 and revolving credit has been slowing more recently. The revision in December’s data resulted in the 6-month ROC and the YOY growth in credit turning negative, which is often a sign of a strapped consumer and a pending recession. This is a worrisome sign. See page 7.

The ISM Nonmanufacturing index increased for the 8th straight month in February and indicated that the service sector was expanding for the 54th time out of the last 57 months. Seven of the 9 components increased in February. Not surprisingly, the inventories index rose the most, from 47.5 to 50.6, as businesses ordered ahead of new tariffs. Most importantly, new orders rose from 51.3 to 52.2 and the employment index increased from 52.3 to 53.0, reflecting solid growth in the service sector in the first quarter. Last but not least, the decline in equity prices has improved market valuation. Although the trailing PE for the S&P 500 is still 23.3 times, it is down two points from a few weeks ago. More importantly, the 12-month forward PE is currently at 18.2 times on earnings forecasts that have been coming down in recent weeks. This is approaching the long-term average of 17.8 times earnings for the first time since late 2023. See page 10.

Gail Dudack

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US Strategy Weekly: The Ides of March

February ended with losses of 1.4% and 1.6% in the S&P 500 and Dow Jones Industrial Average, respectively, and even bigger losses of 4.0% and 5.4% in the Nasdaq Composite and Russell 2000, respectively. Yet this was not surprising since February tends to be the third-worst performing month in the annual calendar, averaging a small loss over the last 75 years. The only other months with worse historical performances are September and August.

The Political Calendar

However, with politics dominating the geopolitical and financial landscape, we found the observations in The Stock Traders’ Almanac (TSTA) regarding the election year cycle and differences between Republican and Democratic administrations, interesting and timely. It is no coincidence that the post-election and midterm years are the weakest years of the four-year election cycle.

According to the TSTA “wars, recessions and bear markets tend to start or occur in the first half of the presidential term and prosperous times and bull markets, in the latter half.”

More importantly, over the last eighteen election cycles the TSTA found a marked difference between the two parties during the post-election and midterm years. “More bear markets and negative market action have plagued Republican administrations in the post-election year whereas the midterm year has fared worse under Democrats.” This is partially explained by the fact that Republicans have often taken the White House after foreign difficulties (Korean War, Vietnam War, the Iran hostage situation) and administered tough fiscal action right away.

Democrats have often come to power following economic duress or leaner times. This allowed Democratic administrations to enact favorable fiscal policies and benefit from an economic recovery phase (1961/1993 recessions, the Financial Crisis, the Covid-19 pandemic). As a result, the post-election year tends to be the weakest year in a four-year Republican administration and the midterm year is usually the weakest year in a four-year Democratic administration. This was proven true in the Biden administration and may be a template for the current Trump administration.

A Normal Correction

In our view, the market is undergoing its first 10% correction since the 2022 low, which is normal and long overdue. The Nasdaq Composite index and Russell 2000 are trading below their 200-day moving averages and are down 9.0% and 14.0%, respectively, from their recent highs. The Dow Jones Industrial Average and S&P 500 are down 5.5% and 4.8% from their record highs, respectively, yet remain above their key moving averages. The S&P 500 tested its 200-day moving average, currently at 5723.23, on an intra-day basis this week. And while the S&P has broken its 200-day moving average on occasion it proved to be a key support level in October 2023 and August 2024. In this regard, the equity market is at a pivotal point from a technical perspective.

One indicator that suggests this decline is not the start of a bear market is the American Association of Individual Investors sentiment index. This week bullish sentiment tumbled 9.8% to 19.4% and bearishness jumped a massive 20% to 60.6%. A combination of 20% or less bullishness and 50% or more bearishness in the AAII survey is rare and has been a positive sign for the market. The current 19.4%/60.6% split has driven our 8-week bull/bear spread to negative 9.7%, the lowest and most favorable level since May 2023 (during the 2022-2023 low). Plus, our 25-day up/down volume oscillator is at negative 1.27, which is above a negative 3.0 oversold reading, which would display a substantial increase in activity in declining stocks. In a bull market, oversold readings in the 25-day oscillator do appear but should be brief and trigger a rebound. A test may still be ahead for this indicator.

There are many market-moving events this week, which include pausing military aid to Ukraine, 25% tariffs on nearly all goods from Mexico and Canada, Canadian energy taxed at a 10% rate, additional 10% tariffs on all imports from China, and retaliatory tariffs announced by China and Canada.

On March 4, these escalating trade tensions rattled global markets and sent the Dow Jones Industrial Average on a roller coaster ride of down 823 points at 11:30 am, up 109 points to 43,082 at 3:25 pm, only to close at 42,520.00, down 670.25 points for the day. However, Secretary of the Treasury Scott Bessent’s statement that he believed China would absorb the 10% tariff increase, much as they had with earlier tariffs, did little to calm markets. And all of this chaos is taking place hours before President Trump presents his State of the Union address on Tuesday evening. Political pundits are indicating that the Democratic party is planning multiple forms of protest during President Trump’s presentation to the joint Congress. With or without protests, this State of the Union address will be widely watched around the world!

The Positive Side of the Coin

The good news about the current geopolitical situation is that the tariff threat is now a reality as are retaliation tariffs by Canada, Mexico, and China. In our experience, markets can deal with good news or bad news, but uncertainty is what generates the greatest fear and biggest market declines. All in all, we believe the US can withstand the tariff battle better than our counterparts although there will clearly be winners and losers in terms of individual corporations. But if we are right, this correction will generate a longer-term buying opportunity for investors. Our concern is that slower economic activity for key trading partners will negatively impact the US, as well as multi-national earnings. Time will tell.

Another trigger for the recent market weakness was the release of the Atlanta Federal Reserve’s GDPNow estimate. This indicator is actually less of a forecasting tool than it is a calculation based upon released economic data; however, the GDPNow moved from targeting first quarter GDP growth of 2.3% on February 26, to a negative 2.8% growth rate on March 3. This massive swing in expected first quarter GDP resulted in an immediate 50-basis point decline in the 10-year Treasury bond yield and stirred fears of a recession. Again, note that the stock and bond markets are currently discounting a series of negative events and pessimistic forecasts that may or may not happen.

This week we also discuss the second monthly decline in pending home sales, a weakening new home sales trend, a favorable ratcheting down in the PCE deflator and its underlying components, solid personal income growth but a deceleration in real personal disposable income growth, a rise in household savings, and a small decline in the ISM manufacturing index for the month of February.

The employment report for February will be reported later this week and given the state of the stock market it could be a market moving event.

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US Strategy Weekly: Climbing? A Wall of Worry?

The new administration, now in its fifth week, continues to be the main topic of conversation in almost every economic and political circle around the world. However President Trump’s campaign promise of a peace deal in Europe is gaining momentum this week and an agreement could be on the horizon. Some progress has even been made in the Middle East. Germany has a new conservative leader – Friedrich Merz – and he is already considering a special fund for increased military spending. In the United Kingdom, UK Prime Minister Keir Starmer took steps to ramp up its defense spending ahead of his meeting with President Donald Trump later this week. This is an impressive list of achievements for this young administration. But domestically, the press primarily focused on emails from Elon Musk asking all federal employees to send him a list of recent accomplishments. Such a request would not be unusual in the private sector, but for many government employees, it was the cause for a total meltdown. More importantly, it was not the most significant event of the week but it did gather the most media attention.

Meanwhile, a string of recent US economic data points such as retail sales, the NAHB housing market index, new residential construction, and consumer sentiment suggest economic activity may be slowing. The Treasury market appears to believe this is true and yields in the 10-year Treasury bond fell from a high of 4.54% last week to 4.29% this week. Investors also appear to be worried that the layoffs either taking place, or about to take place, in the federal government will negatively impact the February jobs report. This, coupled with the predicted inflationary effect of tariffs, would hurt the overall economy.

Tariffs are yet to be put into place and we doubt that many will be, with the exception of China. But to check the theory of the impact of layoffs in the federal government, we looked at recent Bureau of Labor statistics. We found that the not-seasonally-adjusted level of total nonfarm employment was 157.1 million at the end of January and of that figure federal employees (excluding US Postal Services) represented 2.4 million workers, or 1.5% of the workforce. Since the federal government is the goal of DOGE, and layoffs are to be expected, even a 50% reduction in employment (an extreme case), would equate to 0.75% of the total nonfarm US workforce. Looking further, we found that while the overall unemployment rate was 4.4% in January, for government workers the rate was 1.6%. In short, government workers have not faced the normal ups and downs of economic cycles or unemployment lines, which may explain the pandemonium now seen in Washington DC.

But there is no doubt that the speed of this administration’s actions are creating confusion among some and heightened anxiety among others. The recent Conference Board consumer confidence release showed that consumer sentiment fell in February from an upwardly revised level for January. While the decline in present conditions was modest the decline in expectations was substantial. This is a pattern seen throughout a number of sentiment indicators. At 98.3, the headline index was the lowest since June 2024. The University of Michigan sentiment release was a bit different, with the headline index of 64.7 falling a substantial 7 points to its lowest level since November 2023. This was due primarily to a 9.4 point decline in present conditions to 65.7. In February all three segments of the University of Michigan survey were below 70 for the first time since July 2024. What also disturbs Wall Street traders was that Inflation expectations for the next 12 months soared from 3.3% to 4.3%. See page 3.

Sentiment varied significantly when analyzed by educational level and by current situation versus expectations. In January current conditions sentiment soared, particularly among the college educated, although this index also weakened a bit in February. Sentiment among those with some college education continued to rise in February as it has since the 2024 low. But expectations sentiment plummeted for all groups in February, with the largest decrease seen for participants with a high school diploma or less, where the index fell 23.5 points from 91.3 to 67.8! See page 4.

And the University of Michigan survey showed big discrepancies in sentiment depending upon age and political affiliations. Those 18 to 34 in age had an increase of 10.6 points in current condition sentiment, while the 35 to 54 age group had a 3.3-point decline in January. Those 55+ had a 0.4 point increase in current conditions. Not surprisingly, sentiment by political party affiliation could not be more different and are roughly mirror images of each other. Republican expectations soared in January as Democrat expectations plummeted. Both fell slightly in February. Sentiment for independent voters was somewhere in the middle of the two but declined in February. See page 5.

A survey of personal finances followed a similar pattern with current finances rising for the fifth consecutive month to 87; while expectations of future finances fell two points to 109. Again, surveys are showing that consumers are positive about their current situation but are fearful of what may be ahead. Sentiment of whether $1000 invested in a mutual fund would be worth more in the next twelve months, fell from 59.5 to 55.9 in January. See page 6.

This waning confidence in the equity market is also seen in the American Association of Individual Investors survey on page 12. Last week’s American Association of Individual Investors survey showed bullishness rose 0.8% to 29.2% and bearishness fell 6.8% to 40.5%. Bullishness remained below average for the third consecutive week and bearishness stayed above average for the fourth consecutive week. The decline in bearishness means the survey inched away from the bull/bear split of 20/50 which is rare and very favorable. Nevertheless, the 8-week bull/bear is minus 4.4% and closing in on a positive reading of minus 7.0%.

All in all, we see the rise in investors’ bearishness and the decline in long-term interest rates to be more positive than negative for the equity market. We would be more concerned if these were reversed. The February jobs report will be released next week, and it could be a market-moving event. However, we do not expect it will show a major change. The technical condition of the stock market has deteriorated a bit this week but is in line with a 10% correction which is long overdue. Recent weakness in the equity market carried the S&P 500 below its 50-day and 100-day moving averages for the first time since January 13, 2025. The Dow Jones Industrial Average is the outperformer and is trading above its 100-day moving average. The Nasdaq Composite index is currently below both moving averages and the Russell 2000 index, the weakest of the four indices, is trading below its 200-day moving average. This is the indicator to watch since it is about to test an uptrend off its 2023 low. The 25-day up/down volume oscillator is at 0.33 this week, neutral, but down for the week. This oscillator rose close to an overbought reading of 3.0 or greater, twice this year, without reaching overbought to confirm the recent advance. The 10-day average of daily new highs is 172 this week and new lows are averaging 104. This combination of daily new highs and new lows above 100 is a change that turns this indicator from positive to neutral. The NYSE cumulative advance/decline line made a new high on February 18, 2025, confirming the SPX high on February 19, 2025. In sum, breadth indicators are weaker this week but continue to have a long-term bullish bias. See page 9-11.

Gail Dudack

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It’s the Market That Makes the News

DJIA: 44,176

It’s the market that makes the news … thank goodness. Tariffs now seem almost a common event, DeepSeek has threatened the market’s most prized stock, Nvidia (140) and AI itself. The government is in chaos and so too governments around the world in this new fend for yourself environment. There have been a few downdrafts including Thursday’s – the others have proven brief, leaving one to question how the market has held together as it has. An impromptu answer would seem you have to know markets. They hear a different drummer, the one of supply and demand. The market hasn’t gone down so far apparently because its not ready to go down, this despite multiple opportunities.  You can learn a lot about markets by what they do, and sometimes you can learn a lot about markets by what they fail to do.

The market has been in a trading range on two fronts. The first and most important, the level of stocks above the 200-day average has ranged between 50 and 60%. As this measure pretty much defines a stock’s trend, it’s more than a little disconcerting to see the S&P at a new high, while almost half of NYSE stocks remain in downtrends. This kind of divergence typically ends badly. On the positive side, rather than continue to drop from 70% to a more typical 20 – 30%, the mid-50s has held.  The second aspect of the trading range obviously has been the S&P, which for the second time in the last two months finds itself trying to break out. Historically these trading ranges, when within 5% of a high, have positive outcomes more than 70% of the time, according to SentimenTrader.com.

It’s interesting that A/Ds have steadily improved, always important, and yet the improvement hasn’t been enough to push more stocks above their 200-day. Our suspicion is that it’s likely due to the underperformance of most commodities, and even the dichotomy within Tech. Not that long ago Software led, and Semis lagged, now it is pretty much the opposite. Meanwhile, there may be a light at the end of the tunnel for commodities, the light being China. China is the world’s largest consumer of copper, and if copper goes the rest usually follow. The Hang Seng has seen 60% of its components move above their 50-day average, and 8% of shares reach a12-month high. Both typically lead to higher prices.

An ETF we’ve come back to recently is Momentum Factor (MTUM – 225), which recently made a new high. It is dynamic in the sense there is a formula for adjustment, and at least for this market the top 10 holdings seem a bit of genius. The success here seems not just about winning stocks, but its peculiar diversification. Indeed, who or what AI program would own both Palantir (106) and Philip Morris (152)? When it comes to the latter, you might ask if they got the symbol wrong, but not when you look at the chart. And then there’s JP Morgan (267), one of the best of the much needed Financials, given this market’s propensity to switch between Financials and Tech.

It’s a bull market but a strange one, not one that leaves you feeling all warm and cuddly. Slamming Palantir Wednesday, arguably the leading AI stock, and Walmart (97) Thursday may be part of it. For Palantir, the weakness is a flesh wound, but the leader of your cult is not supposed to be selling, though he sold almost the same amount last year. For Walmart it has been so long since it has taken a hit most have forgotten it happens. It’s on the 50-day, which has held for quite a while, and if you need further consoling, look at a monthly chart. In both cases, however, they didn’t exactly ignore bad news. Meanwhile, Gold doesn’t quit, once again Bullion (GLD – 271) more than the Miners (GDX – 42). Farmers have been hurting and killing USAid makes things worse. Yet Deere (496) acts well!.

Frank D. Gretz

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