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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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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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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If you own a business that is part of the traditional mainstream of any industry, you will probably be very skeptical of any innovative upstart that enters your world. Not all upstarts are disruptors, but some are, and a few are legendary. For example, in 1994, Amazon.com, Inc. (AMZN – $226.65) led by Jeff Bezos, began a new online marketplace for books and soon became a massive disruptor to traditional bookstores. Not only did Amazon deal a major blow to Barnes and Noble (founded in 1873), but over time it changed the entire retail industry. Change is not easy for anyone. I remember being upset when the Borders bookstore closed in my neighborhood in 2011. Borders was a special place where I could take my young son on a Saturday morning, and he could peruse Manga (Japanese comic books) while I sipped a cappuccino at the instore coffee bar. I was an early skeptic of Amazon. Nevertheless, I am now an Amazon Prime member. Technology has and continues to change many industries, and artificial intelligence will take this to another level. In the end, bookstores have faded away, just like Blockbuster, the video store chain ended when streaming became available. It is impossible to say right now, but technology may also be changing politics.

President Trump has always been a disruptor. But in his second term, Elon Musk, and his expertise in technology, artificial intelligence, and business, may become a true disruptor of the political scene as we know it. By combining modern technology and business acumen to find redundancies, fraud, and dark pools of money in the political system, we wonder if Washington DC will ever be the same. Transparency of government money flows has been absent for generations and Washington DC is bereft of modern software systems and people who know how to use them. So, Elon Musk, by posting his findings on the DOGE website, is educating the voting public of the inner workings of federal agencies. This may be why we are seeing so much head spinning and uproar in the federal government this week. However, if this disruption actually results in reducing the federal deficit and making the government more efficient, we cannot imagine how anyone could be opposed. Nonetheless, it will mean many career federal workers will lose jobs and we doubt that they will go quietly.

The stock market has clearly taken the worries about tariffs in stride. The S&P 500 index scored a record high this week, and most of the other popular indices, including the Russell 2000 index, are not far behind. See page 11. Our 25-day up/down volume oscillator is at 2.77 and closing in on an overbought reading. In this indicator an overbought reading that lasts a minimum of five consecutive trading days or more, confirms a new high. What this would signal is that volume is supporting higher prices. See page 12. Last week’s American Association of Individual Investors (AAII) survey indicated that bullishness fell 4.9% to 28.4% and bearishness rose 4.4% to 47.3%. Bullishness has declined 15% in the last three weeks and bearishness has increased 18%. These numbers are close to a bull/bear split of 20/50 which is rare and favorable. The 8-week bull/bear is minus 2.6% and neutral but closing in on a positive reading of minus 7.0%. See page 14. In short, the technical backdrop of this stock market continues to be favorable.

Conversely, valuation is not supportive of equities, but this is not new. Momentum, hope, and sentiment have been overruling valuation for two years. The SPX trailing 4-quarter operating multiple is 25.8 times, and well above all long- and short-term averages. See page 9. However, we have noticed that analysts have been raising their 2024 earnings estimates as fourth quarter earnings season ends but simultaneously lowering estimates for 2025 and 2026. Fears of economic slowdown and higher inflation as a result of tariffs appear to be the underlying cause of earnings forecasts falling, but we believe this is overdone. If we are correct, there will be positive earnings surprises on the horizon and that should support equities. See page 10.

Recent inflation data was unfriendly, but the consensus has already shifted to no Fed rate cuts for the near future, so this did not impact financial markets. Headline CPI rose from 2.9% YOY to 3.0% YOY and core CPI increased from 3.2% YOY to 3.3% YOY. Owners’ equivalent rent remains high, but it did inch down from 4.8% YOY to 4.6% YOY. The areas of concern in January’s report were transportation, which rose 1% over the month, and 3.2% YOY, and eggs, which are now in short supply due to the avian flu. The index for meat, poultry, fish, and eggs soared to 6.1% YOY in January, up from 4.2% YOY in December, but egg inflation should be temporary. For January, food at home rose 1.9% YOY (up 0.1%), but food away from home fell to 3.4% YOY (down 0.2%). See page 3.

Service sector inflation is slowly ratcheting lower, but it remains high at 4.2% YOY. Services less rent of shelter was 3.9% YOY, down from 4%. However, most core indices have been trending up, not down in recent months. One of the Fed’s favorite inflation benchmarks is all items less food, shelter, and energy, and it rose to 2.3% YOY, up from 2.1% YOY in December. See page 4.

The PPI indices had relatively small changes in January. The finished goods index was 2.9% YOY, up from 2.8% YOY, and core finished goods rose 2.2% YOY down from 2.6% YOY. PPI final demand was 3.5%, unchanged from December, but still at the highest pace since February 2023. The main issue regarding these benchmarks is that rising inflation indices also mean the real fed funds rate is falling, leaving the Fed no room to lower rates. Unless inflation data improves in coming months, the consensus view could shift from Fed rate cuts to Fed rate hikes in 2025. See page 5.

January retail sales were solid. Advance estimates for total retail and food services sales for January 2025 were $723.9 billion (seasonally adjusted), down 0.9% on a monthly basis, but up 4.2% YOY. Total sales excluding motor vehicles and parts were up 3.7% YOY and excluding autos and gasoline stations were up 3.9% YOY. Motor vehicle & parts dealers rose a solid 6.4% YOY and gasoline stations increased 2.0% YOY. General merchandise store sales increased 3.7% YOY (an acceleration) and nonstore retailers rose 4.7% YOY (a deceleration). See page 6.

Industrial production rose 0.5% in January following an upwardly revised 1% gain in December. The overall industrial index rose 2% YOY. Manufacturing output rose 1% YOY and mining production rose 3.4% YOY. Utilities output, which can be volatile and weather-dependent, rose nearly 7% YOY. Overall, total capacity utilization rose from 77.5% to 77.8% YOY – the highest since August 2024 – and is back in line which levels seen prior to the pandemic. See page 7. Retail sales and industrial production reflect a healthy level of consumption and an expanding economy; however, the housing market is showing some signs of weakness. After three consecutive months of improvement, the pending home sales index fell from 78.5 to 74.2 in December. The National Association of Home Builders confidence index for February also fell for the first time in seven months, dropping from 47 to 42, with the greatest weakness seen in the expected sales over the next 6 months, which declined from 59 to 46. High mortgage rates are one of the reasons President Trump is lobbying for lower interest rates; but this is out of his control. Meanwhile, the housing sector may be slowing.

Gail Dudack

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The 3-week-old Trump presidency continues to generate multiple headlines every day and this week was no exception. The big news was that the United States imposed a 25% tariff on imports of aluminum and steel and also cancelled exemptions for major suppliers such as Canada and Brazil. Trump also imposed a blanket 10% tariff on imports from top trading partner China and threatened a 25% barrier on all imports from Canada and Mexico, as well as looking at new reciprocal tariffs on imports of cars, computer chips and pharmaceuticals. These actions triggered condemnations by Mexico, Canada, and the European Union and ignited fears of a trade war; yet the stock market was unmoved. In our view, this stoic reaction by the market was rational because from a purely economic perspective these tariffs will be very troublesome for Mexico, Canada, China, and other major exporters to the US, but they are unlikely to be much of an issue domestically. And as we noted previously, a strong dollar will help to mute the impact of tariffs. More importantly, these tariffs are more likely to change the behavior of consumers and corporations and nullify much of the impact of tariffs. At least this is the long-term goal and US equities appear to have figured this out.

Gold has risen 16% since Trump was elected and the media has attributed this to the unpredictability of President Trump and the potential of trade wars; however, many precious metal analysts have noticed that demand for gold from abroad, particularly China, has increased and this is a reaction to their concern of weakness in their own currencies and a fear that tariffs will pressure their already declining economies. However, our favorite event of the week was the 30-minute press conference in the Oval Office with President Trump, Elon Musk, and X Musk, where Elon detailed much of what DOGE is doing and finding. Plus, Elon gave a mini course in business discipline and accounting. Nevertheless, the star was little X who clearly stole the show. (https://www.foxnews.com/video/6368671861112)

Overall, the story of the week was the resilience of the stock market even though a wave of tariffs were being imposed. Perhaps more surprisingly, our technical indicators improved this week. The 25-day up/down volume oscillator is at 1.42 this week, neutral and down a bit from two weeks ago when it was closing in on an overbought reading of 3.0 or greater. Nevertheless, it has a bullish bias. See page 14. The 10-day average of daily new highs is 162 this week and new lows are averaging 75. This combination of daily new highs above 100 and new lows below 100 is definitely positive. But the surprise of the week was the NYSE cumulative advance/decline line which made a new high on February 6, 2025. The previous high was made in November, generating a period of nonconfirmation; however, this new high confirms the current advance. See page 15. Last week’s AAII survey showed bullishness fell 7.7% to 33.3% and bearishness rose 8.9% to 42.9%. Bullishness is now below average, and bearishness is above average, which is a favorable combination for the equity market. See page 16. All in all, these indicators, along with the charts of the popular indices, are all bullish.

What is not bullish is the growing federal deficit. This is shown on page 3, with newly released data from the CBO, the fiscal 2024 (September 30, 2024) deficit was 6.2% of GDP. However, new Treasury data show federal debt subsequently grew $711 billion in the last three months of 2024, and the 12-month deficits-to-GDP rose to 6.9% (October), 7.1% (November), and 6.8% (December). This combination of rising deficits and rising interest rates has lifted interest payments as a percentage of outlays from 5.3% in 2020 to 13.1% in 2024. These deficit trends are unsustainable. See page 3.

Nonetheless, economic data has been favorable. The ISM nonmanufacturing index fell 1.2 points in January but continues to show an expanding service sector. See page 4. The NFIB small business survey dipped 2.3 points in January but remained above the long-term average of 98 for the third consecutive month. See page 5. The January employment report showed a 143,000 increase in the month of January, while revisions to previous months added an additional 100,000 more jobs. The household survey showed the unemployment rate fell slightly from 4.1% to 4.0% in the month. See page 6.

Unfortunately, the January employment release is a difficult report to analyze due to the annual benchmark revisions in the establishment survey, the Census population revisions to the household survey, and the updating of seasonal adjustments in both surveys. This year the establishment survey benchmark revision for March 2024, without seasonal adjustments, lowered employment by 598,000 workers, or 0.4%. This was unusually large since the typical revision is plus or minus 0.1%.

The population adjustment to the household survey increased the civilian noninstitutional population (age 16 and over) by 2.9 million and increases were substantial for Asians and Hispanics. The total civilian labor force increased 2.1 million, including an increase of 2.0 million in employment and 105,000 in unemployment. The number of people not in the labor force increased by 765,000. As is its usual practice, the BLS does not revise official household survey estimates for earlier months and therefore this bump in population is very obvious in many of the charts on the following pages. The uptick in January employment in the household survey depicts a 1.7% YOY growth rate, which is well above the long-term average of 1.5%. However, this spike in employment could be less an increase in real workers and more an increase in the Census Bureau’s estimate of population growth. Still, we are relieved that the household survey, which had been showing no employment growth for much of 2024, could simply have been an undercounting of both population and employment.

Nevertheless, the January report is dubious for a variety of reasons. We know that seasonal adjustments were revised in both surveys, however there were unusually large differences between the seasonal adjusted data and the not-seasonally-adjusted data this month. For example, January’s establishment survey showed the addition of 143,000 new jobs in seasonally adjusted data, and a loss of 2.85 million jobs in the not-seasonally adjusted data. That is a strangely large discrepancy.

In the household survey, January’s seasonally adjusted unemployment rate fell from 4.1% to 4.0%, but the unadjusted unemployment rate for those 16 and over rose from 3.7% to 4.2%. Unadjusted unemployment rates for men, women, and workers by level of education also rose in January. Only the not seasonally adjusted unemployment rate for those with less than a high school diploma actually fell from 5.6% to 5.2%. Those with a bachelor’s degree or higher saw their unemployment rate ease from 2.4% to 2.3%. But other educational categories saw a rise in their unemployment rates, contrary to the decline in the overall rate. Similarly, native versus foreign employment statistics, which are not seasonally adjusted, showed the native unemployment rate rising from 3.7% to 4.3% and the foreign unemployment rate rising from 4.3% to 4.6%. The seasonally adjusted employment-population ratio and labor force participation rates both rose 0.1% due to Census revisions, but the unadjusted employment population ratio fell from 59.3% to 57.6%. In sum, January’s job report is filled with contradictions. We wonder if Elon Musk and his minions can do something to improve government agency data.

Gail Dudack

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The first two weeks of Donald Trump’s presidency have been both hectic and head-spinning. And while some might call these past few days chaotic, the new administration has definitely been impactful, transparent, accessible, and game changing. And despite a tremendous amount of pearl-clutching by the media, the much-telegraphed tariffs on goods from Mexico, Canada, and China did not hurt the financial markets like most economists expected. To date, what has materialized are postponements due to potential political agreements with Mexico and Canada. The objectives here appear to be the monitoring of both borders to help prevent illegal immigration and the smuggling of illegal and lethal fentanyl.

Tariffs and deals with China may be more difficult to resolve in the near term, but China is also pivotal in terms of illegal fentanyl and that may be one of the longer-term goals. Meanwhile, economists and analysts are revising forecasts on future corporate earnings, inflation, and the economy based upon the administration’s actions, but if one is honest, no one knows how the tariffs will play out, even the negotiators. These tariffs are part of a process and Trump’s administration is currently working on a vast number of negotiations making outcomes extremely difficult to predict. Most importantly, one should not let personal political views color one’s forecast. In our view, it is important to analyze economic data skeptically and to make predictions objectively and separately from media headlines.

What is known is that Donald Trump used tariffs successfully in his first term and it did not impact inflation. What it did do was change American and global corporate behavior and as a result China lost manufacturing to other areas of Asia, such as Vietnam, Malaysia, and Cambodia. President Trump has been clear that this is another one of his goals and he is using the threat of tariffs as a catalyst to bring manufacturing back to the US. It is important to remember that inflation was 1.9% YOY when Trump left office and President Biden maintained Trump’s tariffs when he came to office.

This time it is different however because inflation is already a problem and service sector inflation has been sticky for several months. Farmers are facing rising feed stock costs, and this will trickle down into higher food prices. On the other hand, energy prices are expected to move lower. This could offset some of these threats and a higher dollar will also mute the potential impact of tariffs on imported goods. (But it will also be a handicap for exporters.)

What is also known is that President Trump takes pride in his pledge of “promises made, promises kept,” and this will be the cornerstone of his four years. To this end, the key financial-related promises are to increase energy production, increase jobs, reduce or eliminate government waste, lower taxes, and put the US in better fiscal shape. While not being specific, in our view, putting the US in better fiscal shape is apt to include a mixture of boosting economic activity and shrinking annual deficits. This combination would thereby lower the total public debt-to-GDP ratio which rose to 120% as of December 19, 2024 (https://fred.stlouisfed.org/series/gfdegdq188S). These are ambitious goals, but goals that are difficult to challenge.

The last week has also been hectic in terms of corporate earnings and economic releases. According to an S&P earnings scorecard, of the 211 companies in the S&P 500 that have reported earnings for the fourth quarter, 76.8% reported above analyst expectations. In general, earnings have helped boost equity prices.

Economic releases were mixed this week. In December, personal income grew 5.3% YOY, disposable income grew 5% YOY, and real personal disposable income (RPDI) grew 2.4%. RPDI fell from 2.6% in November and was below the long-term average of 3.2% for the tenth month in a row. See page 4. Government workers had the largest increase in wages in December with a gain of 6.5% YOY, and this pattern of government wages growing faster than private sector wages, has been ongoing since November 2022. Manufacturing workers had minimal increases in wages in the last six months of 2024. Meanwhile, government transfer payments and supplements to wages were robust in 2024. See page 5.

Personal consumption expenditures rose 5.7% YOY in December and service sector expenditures grew 6.7% YOY. In short, the growth in spending was greater than wage growth for most households, so it was not surprising that the savings rate fell from 4.3% to 4.1% at year end. Given this decline in household savings and the persistent rise in prices, household consumption could encounter headwinds in 2025. See page 6.

Average weekly earnings grew 3.5% in December, which was above the 2.9% YOY rate of inflation. However, this gap is narrowing since wage growth has been decelerating and inflation accelerating in recent reports. The PCE deflator rose from 2.4% in November to 2.6% in December and core PCE deflator was unchanged at 2.8% YOY. These figures were a disappointment to the consensus, and it has led to a consensus view that the Fed is unlikely to cut rates again in the near future. We agree. As previously noted, our concern is that farmers are currently seeing a rise in core feed stocks, and this will be a future driver of food prices at home and at restaurants. See page 7.

Hopefully, lower energy prices will offset higher food prices in 2025, however the bigger issue is that core inflation indices have been trending flat to higher. The core PCE deflator was unchanged at 2.8% in December. Core PPI was 2.6%, up from 2.5%, and up for the second month in a row. Core CPI was 3.2% in December, down from 3.3%, but has been stuck at 3.3% for three months in a row. This is why we do not expect rate cuts in the near future. Moreover, the real fed funds rate (fed funds minus the PCE deflator) is currently 180 basis points, down from 300 basis point in August. In our opinion, the Fed’s neutral rate is when the real fed funds rate is 200 to 300 basis points. See page 8.

The most favorable economic release of the week was the ISM manufacturing index for January. It was 50.9 and above 50 for the first time in 26 months! Seven of the ten components were higher in the month. Customers’ inventories were unchanged, and the inventories index and order backlog index were lower. The employment index rose to 50.3 and was above 50 for the first time in eight months. The best component was new orders, which increased from 52.1 to 55.1. See page 9. Since the DeepSeek controversy, technology stocks have underperformed, and this can be seen in the performance of the indices. The DJIA is up 4.7% year-to-date, the S&P 500 and the Russell 2000 are up 2.7%, and the Nasdaq Composite is up only 1.8%. Nevertheless, all the indices are in relatively stable and favorable uptrends. See page 12. Our 25-day volume oscillator remains neutral but has a bullish bias. In summary, we would be a buyer on dips.

Gail Dudack

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This week, Liang Wenfeng, the 39-year-old founder of Chinese AI startup DeepSeek, went from being a total unknown to a well-known market disruptor. Out of the blue DeepSeek launched an open-source free AI assistant that it says uses less data and was developed at a fraction of the cost of current services. This triggered a global selloff in technology stocks, and a rout in key stocks like Nvidia Corp. (NVDA – $128.99). Analysts are still determining what this will mean for the AI world. However, the downdraft in equity prices was short-lived, and most stocks rebounded the following day. Still, the controversy will remain. Even though DeepSeek’ s “free” AI is an attractive alternative to many around the world, it collects and stores all user data in China. If it is not TikTok, it is DeepSeek.

Despite the momentary shock of DeepSeek, both the S&P 500 and the Dow Jones Industrial Average remain just fractionally away from setting new all-time highs. The Nasdaq Composite, which was impacted the most by the news, is only 2.2% away from its recent high. The Russell 2000 index, which a few sessions ago was threatening to break below its 200-day moving average, has also rallied and is now above its 100-day moving average and approaching its 50-day moving average. All in all, the charts of the popular indices remain solidly bullish. See page 9.

A Positive Shift in Technicals

More importantly, the 25-day up/down volume oscillator is at 2.16 this week, in neutral territory, but up significantly from a week ago. In fact, it is closing in on an overbought reading of 3.0 or greater. This uptick in the volume oscillator materialized despite the DeepSeek collapse in equities. This is surprising, but 25 days ago the market experienced a 91% down volume day after the Federal Reserve shifted its forecast from four to two rate cuts this year. Twenty-five days later, or on January 27, 2025, downside volume was only 54% of total volume. In short, the DeepSeek decline did nothing to hurt our technical indicators. In fact, the indicator is closer to producing five consecutive days in overbought territory – which would confirm the current advance — than it was a week ago. See page 10.

In addition, the 10-day average of daily new highs is 178 this week and new lows are averaging 50. The combination of daily new highs above 100 and new lows below 100 is a major positive shift and swings this indicator from negative to positive. The NYSE advance/decline line last made a record high on November 29, 2024, but the disparity between this peak and current levels has been narrowed to a net 1880 issues. See page 11. In sum, breadth indicators have turned much more favorable this week.

Investor sentiment also had a big shift this week. The American Association of Individual Investors (AAII) survey showed bullish sentiment jumped 18.0% to 43.4% while bearishness fell 11.2% to 29.4%. Bullishness is no longer below average (and closing in on the positive 25% level), and bearishness is no longer above average. Both levels are currently neutral but note that sentiment came close to a positive signal a few weeks ago. See page 11.

Fed Week

The FOMC meets this week, but it should be uneventful. The CME forecasts a 97.3% probability that no change in policy will take place at this meeting, and we agree. See page 3. It has been our view that there would be two or less rate cuts in 2025. However, the enthusiasm of the small business community since the election could translate into more job growth and therefore no rate cuts in 2025. However, assessing job growth could become extremely difficult in coming months. The January employment report (to be released February 7, 2025) will contain a number of significant benchmark revisions. In August the Bureau of Labor Statistics estimated that one revision would lower the establishment survey by 818,000 jobs. In some cases, data will be revised back to April 2023, some data back to January 2020, and some data not at all. These changes occur every year but revisions typically average only 0.1%. The upcoming revision is anticipated to be a 0.5% decline, or five times the norm.

In addition, fourth quarter earnings releases are expected from 98 S&P 500 companies this week; and to date, the season has been impressive. Currently 81% of companies reporting have beaten expectations. If the post-Covid stimulus years are excluded, 81% would set a record. Equally important is the fact that only 4.34% of S&P companies repurchased 4% or more of their shares in the quarter. This is a relatively low percentage, and it means that the quality of earnings in the quarter is high. See page 3.  

Housing and Sentiment

The housing market displayed green shoots at the end of the year. New home sales climbed to 698,000 annualized units in December, up 6.7% YOY and back above the pre-pandemic average of 600,000. The inventory of new homes for sale was up 1% over the month and the months’ supply of inventory at the current pace of sales was 8.5. The median price for a new home was $427,000, up 2% from a year ago.

Existing-home sales rose to a seasonally adjusted annual rate of 4.24 million, up more than 9.3% YOY, the largest yearly increase since 2021. The median price of a new home was $404,400, up 6% from a year earlier. The months’ supply of existing homes for sale fell from 3.8 to 3.3 and single-family supply fell from 3.7 months to 3.1. This decline in supply should keep home prices stable to higher in coming months. In sum, there was a nice improvement in the housing market at the end of 2024 and it will be important for this to continue. Pending home sales for December will be released later this week, and this index also showed improvement in the final months of the year, rising from 70.6 in August to 79.0 in November. See pages 4 and 5.

The Conference Board consumer confidence index for January was lower but it remains in the middle of the range it has held for the last 3 years. The headline index fell from an upwardly revised 109.5 to 104.1. Both the present conditions and expectations components fell. Similarly, the University of Michigan consumer sentiment index was lower in January after a substantial gain in December. The headline index fell from 74.0 to 71.1; present conditions eased from 75.1 to 74.0 and expectations were down from 73.3 to 69.3. There has been a string of sizeable revisions in both indices in recent months and this makes the overall trend of sentiment surveys difficult to assess. Nevertheless, January’s sentiment readings were much better in January than they were a year ago. See page 6.

In Sum Equity valuation remains high. The SPX trailing 4-quarter operating multiple is 25.7 times, and well above all long- and short-term averages. The 12-month forward PE multiple is 24.2 times and when added to inflation of 2.9%, it comes to 27.1, which is well above the top of the normal range of 14.8 to 23.8. See page 7. By all measures, the equity market remains richly valued and is at levels last seen during the 1997-2000 bubble, the financial crisis of 2008, or the post-COVID-19 earnings slump. However, this has been true for two consecutive years, and it has been ignored. In our view, the odds of better earnings growth in 2025 and 2026 have improved and this may be the most important factor.  

Gail Dudack

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