NEWS
What Happened Last Week
February’s unemployment rate ticked up to 4.1% from 4.0% the previous month.
More recently, the number of Americans filing for unemployment fell to 220,000, beating expectations.
Employers added 151,000 jobs in February.
Consumer spending, measured by core retail sales, fell month-over-month by -0.22% in February. This marks the second month in a row of reduced spending after January’s drop of -1.27%.
Inflation, measured by the Consumer Price Index (CPI), rose only 0.2% in February instead of the 0.3% expected rate. This annualized 2.43% rate is encouragingly approaching the Fed’s average 2% target.
While American household debt levels, as well as delinquency levels, have increased in recent months, debt service only came to about 11% of total disposable income near the end of 2024.
The Euro Zone, along with the UK, have not experienced the magnitude of downward movement that the US has these past few weeks. The MSCI EMU Index (Euro Zone) and the FTSE 100 (UK) are above even their 50-day moving averages.
How I See It
Fundamentals often change gradually. Sentiment changes on a daily basis.
Currently, we’re seeing fundamentals that continue to report healthy levels.
- The US remains at full employment (unemployment of less than 5%).
- Inflation has shown recent progress.
- Money supply growth is unlikely to spur materially high inflation going forward.
- Household debt still remains well within the range of sustainability for the average consumer.
- Europe doesn’t appear to be pricing in a strong likelihood of a US recession.
These aren’t typically signs of an impending recession.
What could change things? Frankly, the sudden and heightened expectation of a recession.
If consumers really cut back on their spending, companies froze hiring, and bank loan growth rapidly declined, then this would be a very different story.
Fundamentals can actually be changed due to rapid, large and prolonged negative swings in investor sentiment, which changes habitual behavior.
Everyone’s talking about tariffs right now. But tariffs are among the least likely things, in my opinion, that would send the US into a recession at this point.
My main concern is the “this time it’s different” mentality of a high stock market that’s excused by the optimism of AI’s ability to boost growth through unprecedented levels of productivity.
The market really needs to take a breather, and that’s what it’s been doing so far in 2025.
A bear market is possible, of course, and more likely to begin during the first half of a US President’s term than the second half due to the uncertainty it often creates.
But in my opinion, recent market movement has all the hallmarks of a classic correction, which is much milder in magnitude and shorter in duration than a full-on bear market.
In the next few months, I suspect growth stock will outperform value as markets find their footing. But for long-term investors, a fairly equal split between growth and value in the middle of a bull market is an effective way to diversify away unnecessary risk.