Being strong-willed and unpredictable may be excellent characteristics when negotiating deals with businessmen and adversaries, but the stock market and the financial media are having a difficult time understanding and coping with President Trump and his tariff policy. The stock market, on the other hand, after the initial shock of seeing how high and wide-ranging initial tariffs proposals were, appears to be stabilizing and recovering from its April 8, 2025 lows. This does not mean we would rule out another test of the lows in the near future. In fact, a retest of the lows would be a normal and healthy process. What would also be normal after the recent panic selloff is for the popular indices to remain in a trading range for three to six months as investors digest the long-term impact of Trump’s policies. In our opinion, it may take three to six months to see how trade negotiations and tariff implementation play out in the global economy and in corporate earnings.

The rough boundaries for an intermediate-term trading range in the equity market would be the intraday trading lows of April 7 or April 8 and the resistance at the 200-day moving averages in the various indices. For the S&P 500 this translates into a low of SPX 4835 (the April 7^th intraday low) and a high of 5750 (the current 200-day moving average). This represents a tradable 19% intermediate-term range. See page 12. However, by the end of the year, we believe the S&P 500 can better its 200-day moving average.

One of the more disturbing price trends in recent weeks has been the weakness in the dollar. While everyone frets over tariffs, which may or may not be implemented, the weakness in the dollar, if it continues, will make imports more expensive. Hopefully, the dollar will rebound once markets calm down and the unwinding of leverage is completed; nonetheless, holding at the $100 level is important for the long-term trend of the greenback. Conversely, bond market volatility has also made headlines, but the 10-year Treasury yield, now at 4.35%, appears to be stabilizing. The technical chart suggests the yield is currently at the midpoint of a 2-year trading range. See page 11.

Last week’s AAII survey showed bullishness rose 6.7% to 28.5%, erasing the previous week’s loss, and bearishness fell 3.0% to 58.9%. Last week’s 61.9% bearish reading represented a new high for this cycle and sentiment readings continue to exceed the bull/bear split of 20/50 which is rare and favorable. Equally important, the 8-week bull/bear spread is at minus 32.8% and the most positive since the October 2022 reading of minus 33.5%. See page 15.

And this was not the only “extreme” reference to 2022. The University of Michigan consumer sentiment survey for April showed that expectations fell from 52.6 to 47.2. This reading is even lower than the 47.3 recorded in July 2022 and the 47.4 reported in August 2011. Note that both of these prior readings appeared shortly before significant lows recorded in October 2022 and October 2011. Again, this suggests that the extremes seen in a variety of technical and sentiment indicators point to the market being at or near an important low.

Nevertheless, we have often pointed out that there is a huge disparity between Democrat and Republican sentiment in various surveys and underlying University of Michigan data shows that less than 20% of respondents surveyed this year self-identify as Republican. It could be that Republicans are fearful of self-identifying, or it could mean that the survey has a selective bias. This could be an important distinction since the University of Michigan current sentiment index for Republicans is still rising but the same index is falling for Democrats. See page 5.

According to the University of Michigan, the median consumer expectation for inflation in the next year rose from 3.3% in December to 4.3% in January, to 5.0% in March, and is preliminarily estimated to be 6.7% in April. This is a massive swing in inflation expectations. However, the Federal Reserve of NY’s Survey of Consumer Expectations (SCE) showed one-year inflation expectation was 3% in December, 3% in January, 3.13% in February and 3.58% in March. Meanwhile, the SCE shows the household’s 3-year median expectation for prices has been unchanged at roughly 3% in the same time period. We find the disparity between these surveys is striking and a bit disturbing. Analysts can only be as good as the quality of the data they are analyzing. The University of Michigan seems concerned about this disparity as well. It wrote “Partisan Perceptions and Sentiment Measures” on April 11, 2025 which stated that their survey has been consistent over time and concluded that “Proportions of the three political groups (Republican, Democrat, and Independent) in 2025 are generally within the historical ranges seen since 2017.” This is surprising since the accompanying chart in this document shows that Republicans were roughly 25-27% of respondents in 2017 and were well under 20% in 2025. (Actual percentages were not provided.) See page 8. In our view, we believe consumer surveys are much like recent presidential polls and may not be a true reflection of actual voters or consumers. Polls and surveys, however, can sway consumer, investor, or voter perceptions and this is dangerous. For this reason, retail sales reports will take on added importance in coming months.

But there was excellent inflation news this week. Import prices were up 0.9% YOY in March and prices for Chinese imports fell 0.3% YOY. Headline CPI decelerated from 2.8% YOY to 2.4% YOY and core CPI falling from 3.1% to 2.8% (rounded up). In short, headline inflation is edging closer to the Federal Reserve’s target of 2%. Moreover, the CPI is already below its long-term average of 3.7% and its 40-year average of 2.85% YOY. Plus, we noticed that in the March report the energy price index fell 3.3% YOY with WTI prices down 14% YOY. In April, WTI prices are down 25% YOY which suggests lower energy prices should continue to dampen headline inflation in next month’s report. See page 3.

All core CPI indices have been falling in recent months. In March, all items less shelter (1.5% YOY), all items less food and shelter (1.1% YOY), all items less food, shelter, energy, and used cars and trucks (1.8%), all items less energy (2.8%), and the Fed’s favorite index — all items less food, shelter, and energy (1.8% YOY) — are well below 3%. Even troublesome components like services (3.7%), health insurance (3.1%), medical care (3.0%), and motor vehicle maintenance and repair (4.8%), are down from recent levels of 5%-6% or higher. Only the other goods and services index (3.8%) rose in March from 3.3%. See page 4. ETFGI, a leading independent research and consultancy firm known for its expertise on global ETF industry trends, recently reported that net inflows to the ETF industry in the United States were strong in March and for the first quarter inflows set a new record of $298 billion. This exceeded the previous record of $252.23 billion set in the first quarter of 2021 and the third highest quarter of $232.18 billion in the first quarter of 2024. As result, by the end of March, assets in the US ETF industry were $10.4 trillion, the fourth highest in history, just slightly below the record $10.73 trillion set in January 2025. We found this report to be reassuring since it is the opposite of current media coverage suggesting that global investors are running from US assets. In recent days pundits began to question whether American exceptionalism is over. Thoughts of the end of American exceptionalism are depressing; however, actual data does not support these theories.

Gail Dudack

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Despite Thursday’s 587.58 point decline in the Dow Jones Industrial Average, NYSE volume was back in line with the 10-day average and downside volume was 84% of total volume. This was well short of the 91% down day seen on April 4. In sum, the equity market is retesting last week’s low on lower and less intense selling pressure. This is positive from a technical perspective.

As we noted yesterday “It would not be a surprise if some hedge funds continue to face liquidity problems in the near future. Therefore, investors should expect more unwinding and more volatility in the days ahead.” The recent turmoil seen in the financial markets plays havoc with highly leveraged portfolios and leverage has the potential of creating forced buying and forced selling. More importantly, it can lead to severe liquidity problems for some money managers which could translate into more panic selling. In other words, some market moves are liquidity-driven and not economically driven, and it is important to understand there is a difference between the two. Liquidity-driven declines are short dramatic downdrafts and represent opportunities, whereas economically driven moves can be longer lasting moves.

In terms of economically driven moves, this week marks the start of first quarter earnings season and earnings forecasts will play a major role in the market’s stability or instability in the weeks ahead. In times of extreme stress and uncertainty, it is helpful to look at the history of trailing PE ratios at market lows — not to define a price target — but to look at worst case scenarios. The current trailing PE ratio is 21.9 X and the long-term average is 16.1 X. The 16.1 multiple is too low, in our view, since the current 2.4% inflation rate is below average. The trailing PE ratio at the September 2022 low was 17.6 X and with the S&P/Dow Jones earnings estimate for the end of the second quarter currently at $244.62, this translates to SPX 4305. The intraday low on April 7, 2025 was 4835, or 11% above SPX 4305. (Note that the 10-year average trailing PE is 20.8 and the 20-year average is also higher at 18.8 times.) The current 12-month forward PE is 17.3 times and already below the long term average of 17.8 X. In summary, as the equity market retests its recent low, it is also defining good long-term value.

Gail Dudack

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The April 9, 2025 session generated a 97% up day on NYSE volume that was 1.43 times the 10-day average and it followed the April 4^th 91% down day on volume that was 1.64 times the 10-day average. This combination of panic/forced selling and recovery suggests that the worst of the downside is over. But history shows that lows tend to be retested, and a 97% up day does not mean the indices will not retest and make a lower low. It does suggest that a bottoming process has begun.

Recent market action has demonstrated how leveraged many investors, particularly hedge funds, are at the present time and both the April 4 and April 9 trading sessions included unwinding of positions and short covering. It would not be a surprise if some hedge funds continue to face liquidity problems in the near future. Therefore, investors should expect more unwinding and more volatility in the days ahead.   

Keep in mind that yesterday’s 2963 point increase in the Dow Jones Industrial Average took place after the Trump administration announced a partial 90-day reprieve on its tariff policy. In short, nothing has fundamentally changed, and the financial markets are still vulnerable to daily news items. Equally important, this week begins first quarter earnings season, and corporate guidance will be key to the equity market’s stability.

In sum, the worst of the decline is behind us in our view, but history shows that after a panic selloff the indices tend to trade sideways for the subsequent two to six months – testing the recent lows and resistance being the level prior to the panic. In the current market this would equate to a range in the S&P 500 of 5800-4900.

For the record: yesterday’s 97% up day equals the 97% up day recorded on March 23, 2009 and was only exceeded by the 98% up day recorded on June 10, 2010.

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The breadth and level of tariffs proposed by President Trump on “Liberation Day” took us, and the world, by surprise. It represented a major shift in policy and as a result, global markets responded with record declines. Pundits have been theorizing and criticizing the fundamentals of the “formula” the White House used to explain the various tariff levels on individual countries, but in our opinion, this discussion misses the entire point. There may be a purpose behind the arbitrary tariffs placed on many countries and it is not just about trade. For example, the tariff on Vietnam is extremely high because of its role in the rerouting of Chinese companies’ supply chains. If we are right, President Trump may be trying to unwind the 25-year world-wide political movement of “globalization” on purpose. The theory behind globalization is that “the interdependence and integration among the economies, markets, societies, and cultures of different countries worldwide would expand the global economy and create societal benefit.” Plus, proponents felt that bringing China into the global economy would open the Chinese people to the Western civilization and potentially lead the Chinese government toward a more democratic society. It did not.

In reality, globalization provided a huge boost to the Chinese economy and made China the largest exporter in the world, due in large part to its abundance of cheap (and sometimes with forced or child-age) labor. After 25 years of globalization, China is now a super-economic power, buying and controlling resources such as oil, gas, and minerals, throughout Africa, South America, and the Middle East as part of its Belt and Road Initiative. Note: China has also been buying up American farmland. It allows American companies like Apple to manufacture in its country but subsequently manufactures its own similar cheaper product. (Check the “Made-in-China” website.) Yet, China is still treated like an emerging country by many world agencies. For example, the Paris Agreement created a fund to help poorer countries lower emissions, and it was initially funded by the US, Japan, the UK, and EU members, but not super-power China. (China is also the biggest polluter in the world.) But the negative consequences of outsourcing to China became blatantly obvious during the pandemic. It was the first time most Americans realized their life-saving prescription drugs were manufactured in China. This is ironic since several pandemics including the bird flu and the COVID-19 virus first appeared in China.

In sum, over the last 25 years China not only devastated the US manufacturing sector but has strategically become a powerful and controlling force in a wide range of economic areas. This administration may see this as a matter of domestic security. We now believe President Trump, knowing that China’s domestic economy is weak due to a property-market bust, feels it is time to bring manufacturing, and economic prosperity, back to the US by leveling the playing field of trade. If we are correct, (and the White House will not admit to it), President Trump is playing the long game and there may be more pain ahead for investors.

On the positive side, tariff negotiations could go well and the game of chicken that Presidents Trump and Xi are currently playing could soon end.

From a technical perspective, there are a number of extremes that suggest the equity market should be in the throes of making a significant low. The Vix Index (VIX – $52.33) reached an intraday high of 60 this week, the highest since August 5, 2024. The SPDR Bloomberg High Yield Bond ETF (JNK – $91.23) fell to an intraday low of 91.11 the same day. See page 11. Last week’s AAII bull/bear survey showed bullishness fell to 21.8% and bearishness rose to 61.9%. This was the third highest bearish reading in history, and it was last higher on March 5, 2009 (70.3%) at the financial crisis market low. See page 15. The 10-day average of daily new lows is currently 696, the highest since the September-October 2022 low. See page 14.

The peak-to-trough declines in the S&P 500, Dow Jones Industrial Average, Nasdaq Composite, and Russell 2000 index are 18.9%, 16.4%, 24.3%, and 27.9%, respectively, on a closing basis. In other words, the market has had a bear market decline in seven weeks and most of it in the last four trading sessions. At present, he S&P 500 and the Dow Industrials are testing their 2020-2025 uptrend lines. But a similar trendline is significantly lower at 13,500 for the Nasdaq Composite. The Russell 2000 broke well below its pivotal 2000 resistance/support level and is now trading substantially lower. The next substantial support level is the 2022-2023 support range of 1640-1650. See page 12. Overall, these trends look precarious.

Our 25-day up/down volume oscillator is at minus 1.80 this week and, to our surprise, is not yet oversold. However, our oscillator only uses NYSE volume in order to eliminate the noise from program and high frequency trading. Note 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. Since late 2023, the equity market has rallied prior to reaching an oversold reading of minus 3 or less, so upcoming trading sessions will be a test to see if this pattern continues in 2025. See page 13.

Finally, but equally important, the April 4^th session was a 91% down volume 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 after a series of 90% down days, the appearance of just one 90% up day indicates that the worst of the decline is over. Typically, this helps to identify the low and the beginning of a bottoming process. To date, a 90% up day is missing.

Recent economic releases include the March jobs report which indicated healthy year-over-year employment increases in both surveys. See page 3. The increase in the unemployment rate was merely a decimal-rounding rise to 4.2% in March; but the interesting underlying data showed that the increase in unemployment was only those with a bachelor’s degree or higher. This is a complete reversal of recent trends. See page 5. The small business optimism index fell 3.3 points in March to 97.4, slipping below the key 98 level. Labor costs, the single most important problem for business owners, fell one point in March to 11%, just two points below the record 13% seen in December 2021. See page 6. The ISM nonmanufacturing index fell from February’s 53.5 to 50.8 in March, marking the 55th month of expansion in the 58 months since June 2020. Nevertheless, the service sector expanded at a slower pace in March. See page 7.

Our concern is consumer credit. In February, both revolving and nonrevolving credit contracted on both a year-over-year and 6-month rate-of-change basis. This is only the fifth time since 1960 that consumer credit contracted on a year-over-year basis and each of these previous contractions happened during, or after, a recession. (Not all recessions displayed negative credit growth.) But with that perspective, the current decline in consumer credit growth is ominous and suggests a recession-like environment existed in February, prior to the Trump tariff environment. One of the goals of the Trump administration is to get consumer credit interest rates down, and that is occurring, however, at a slower pace than seen in the Treasury market. See page 8. The recent decline in the equity market is improving valuation, but not to table-pounding levels as of yet. The trailing 4-quarter operating multiple is now 20.7 times, down 5 points in the last three months, and below the 5-year average of 21.5, but still above the 50-year average of 16.8 times. The 12-month forward PE multiple is 16.3 times and below its long-term average of 17.8 times. When this PE is added to inflation of 2.8%, it comes to 19.1, which is down and within the normal range of 15.0 to 24.4 for the first time in 17 months. In short, the overvaluation of the last two years in unwinding.

Gail Dudack

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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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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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