As we wrote last week, the current market rout reminds us of other major panic lows, such as the one in 1987, in which two-day downdrafts on Thursday and Friday were followed by a huge selloff on Monday morning. History has shown that these Monday selloffs are often turnaround days and the beginning of a bottoming process.

Monday’s early morning decline was therefore predictable since individual investors often panic after severe weakness; plus, after two days of falling prices, margin calls (or forced selling) become a factor. This played out as expected yesterday until a rumor (soon dismissed as false) suggested tariffs would be delayed 90 days. This rumor triggered a massive intraday upswing in prices which shows how emotional and oversold the equity market is today. 

Finally, but equally important, the April 4^th session was a 91% down day. This is a reflection of extreme panic, and these 90% down days are helpful in a bear market. They usually materialize in a series, which is the bad news. The good news is that the appearance of just one 90% up day indicates that the worst of the decline is over, and it helps to identify the low and the beginning of a bottoming process. To date, a 90% up day is missing.

In summary, a 90% down day appeared on Friday and now one 90% up day would demonstrate that buyers are returning to the market with conviction. (Our indicators use NYSE volume only in order to eliminate the noise of program/algorithmic/day trading which does not reflect a market stance.)

Gail Dudack

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The early morning news that China is retaliating with 34% tariffs on all imported US goods starting on April 10^th is feeding fears of a recession and a global trade war. China is perhaps in the best position of all countries to retaliate, but equally important, it poses the possibility that other countries will follow suit. This would, of course, be the worst-case scenario for the Trump administration. China’s move has also been the catalyst for several Wall Street firms raising the odds of a recession in the US to more than 50%. Likewise, the high yield corporate bond yield spread soared to 401 basis points, its widest since November 2023.

Today is also employment day, but since the federal employee cutbacks are unlikely to have an impact on the numbers yet, we expect this report will be benign and show slow steady growth in jobs.

There are many possibilities regarding tariffs at this juncture. The Trump administration could announce a number of carve-outs, along with successful negotiations with countries where tariffs have been lowered or totally eliminated and call on China to come to the negotiating table. This would be an opportunity for further negotiations that would lower tariffs and trade barriers across the board and help define an end game for the administration. Or, since nearly all of President Trump’s actions have been challenged by various groups and district attorney generals in the court system, tariffs could follow suit. If so, the court system could stall and potentially block the administration’s entire tariff regime. Or the worst case would be a full-blown tariff war, triggering fears of a global recession.

Today is the last day of the week, a lot of news could unfold over the weekend, and this makes it unlikely that traders will be willing to take a major stand on stocks today. Not surprisingly, markets look like they will open substantially lower. This reminds us of other major panic lows, such as in 1987, in which sequential downdrafts on Thursday and Friday were followed by a huge selloff on Monday morning, until the market reverses on Monday afternoon. Many major bear markets have ended in a similar pattern.

However, what is still missing in our technical indicators is extreme panic, which is identified when 90% of the daily volume is in declining stocks. Yesterday’s session was an 87% down day but it fell short of 90%. These 90% down days are helpful in a bear market because they usually materialize in a series, and the appearance of a 90% up day helps to identify the low – it indicates that the worst of the decline is over. In sum, a 90% up day denotes buyers have returned to the market with conviction. (Our indicators use NYSE volume only in order to eliminate the noise of program/algorithmic/day trading which does not reflect a market stance.) Since we are yet to see a 90% down day, and panic is clearly in the air, investors should be cautious in the very near term since one is apt to appear. The news surrounding the announcement of “Liberation Day” tariffs is purely negative, and though we have a difficult time finding a positive side, we cannot help but think of the Chinese word for “crisis” which is the combination of the characters for “danger” plus “opportunity/inflection point.” For long term investors remember that even though earnings forecasts will also be in flux, falling prices are finally generating value in the equity market.

Gail Dudack

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President Trump’s “Liberation Day” tariff regime was far more extensive and specific than most analysts, and we, expected. Global markets are responding with shock and big selloffs across the board. However, some key areas like pharmaceuticals and semiconductors are exempted and we expect some countries will soon be lowering or eliminating their tariffs on US imports and the US will respond in kind. For example, Israel eliminated all tariffs on US goods prior to April 2, yet this was not mentioned by President Trump at the press conference. Perhaps the administration is waiting to hear from more countries regarding tariffs and will make a larger announcement later this week on the fallout of “Liberation Day.” In terms of transparency, the table shown at the White House announcement regarding tariffs on US exports by country and the “reciprocal” tariffs being imposed was revealing in terms of tariffs on US exports. Some are challenging the White House numbers, but the tariffs being imposed by the US were never larger than those imposed on US exports, and in most cases substantially lower.

Nonetheless, it appears that the administration is not just making a statement regarding the uneven playing field of tariffs on US exports versus US imports but is going for a longer-term shift of bringing manufacturing back to the US. This will take time. And it appears that President Trump and his team are willing to see inflation benchmarks rise in the near term in order to bring more jobs back to the US and improve GDP in the longer run. The media will focus on this short term negative, but investors should focus on the longer-term positive.

What is certain in this time of uncertainty is that the worst of the potential tariff impact is probably being announced and discounted by the financial markets today. There may be a few country leaders that will attempt to start a tariff war, and that will get worldwide attention, but we doubt it will work out well for these countries. It important to remember that the US is the largest consumer in the world and from that perspective, losing the US consumer will hurt any country negotiating with the US from a standpoint of pride rather than logic.

Again, the average household may soon see price differentials at the grocery or retail store, but consumers have options of what to buy and often have substitutes. The beauty of America is that creativity abounds and in time we expect local entrepreneurs will step into areas that will be impacted by tariffs to create a non-tariff option.

In sum, this announcement comes as the equity market is retesting its February 13, 2025 low and those lows could easily be broken temporarily. But in the longer run, we see this as a buying opportunity.

Gail Dudack

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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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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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