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