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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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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