NEWS
What Happened Last Week
Investor sentiment, while still fearful, improved slightly this past week according to the AAII Investor Sentiment Survey.
Sentiment overall is down over the past three months, however, hitting the lowest point at 57 since the November 2022 reading showed 56.7 according to the US Michigan Consumer Sentiment measure.
February’s core Personal Consumption Expenditure (PCE), an inflation measure, showed 0.4% instead of the expected 0.3%.
February’s consumer spending reported lower than expected, 0.4% versus the forecasted 0.5%.
The labor market showed strength as weekly initial unemployment claims reported 1,000 less than expected at 224,000.
New single-family home sales rose 1.8% in February (slightly below expectations), but the Pending Home Sales Index (a forward-looking indicator) showed a 2% gain.
Orders of durable goods (e.g. furniture, technology, cars, appliances, and other items lasting longer than 3 years) unexpectedly rose 0.9% in February, well ahead of expectations for a 1% decline. This surprise is likely due to continued front-loading to get ahead of tariffs.
The S&P 500 remains below its 50- and 200-day moving averages, indicating a higher likelihood of above-average short-term volatility.
The 50-day moving average remains above the 200-day moving average, and the monthly Relative Strength Indicator (RSI) remains above 50, both which indicate the upward trend has not yet clearly reversed.
How I See It
This past week has been one of mixed signals. Good news followed by bad news.
Strong labor markets, strengthening housing markets, strong orders of durable goods.
Weaker-than-expected consumer spending, higher delinquency rates, higher inflation.
At this point, there is so much change occurring that no one knows how to predict what things will look like by the end of 2025.
But from a more aerial view of the markets, aside from the reasons given for recent volatility, this appears very on par with normal market activity.
The initial boost of business optimism from the election year often gives way to a more grounded view in the first year of a Republican President’s term.
A very high price-to-earnings ratio (particularly the Shiller P/E) cannot afford to sustainably grow at such high rates as the past two years without creating increased potential for a bubble to develop. I believe anything beyond market growth of 15% for 2025 would be pushing levels uncomfortably high, given the current economic data available.
Tariff talk, like in 2018, has created a reaction in investor sentiment.
It wouldn’t be unusual to see a bear market develop this year:
- Bear markets statistically develop more often during the first half of a US President’s term.
- The latest bear market in 2022 was not accompanied by a recession, and similar precedents in history show a tendency toward a shorter-than-average bull market afterward.
- The Shiller P/E is very high, which doesn’t reveal the timing of the next bear market, but does often predict lower ten-year forecasted market growth.
Yet, in today’s environment, nothing material has happened except heightened uncertainty over the impact of tariffs. And if there’s anything markets overreact to, it’s uncertainty.
Fundamentally, there’s just not a lot of reason to be overly bearish in an environment where 52% of investors expect a bear market in the next six months due to…nothing particularly convincing.
I’ve discussed in previous newsletters why tariffs are not likely to be a recession-inducing inflationary monster. And if that’s true, then a lot of this fear is simply discounting stocks for another likely run upward to make 2025 a positive year.