Weekly Recap:

by Michael P. Reinking, CFA & Eric Criscuolo

Overall, it was another tough week for US equity markets however, we did end the week on a positive note cutting the overall losses in half. The implementation of steel and aluminum tariffs brought with it another wave of tit-for-tat responses. Meanwhile the administration doubled down on its commitment to move forward with their policy agenda undeterred by the recent volatility. This week’s inflation data came in better than expected but wasn’t enough to overcome the systematic derisking that continued to take place throughout the week. Consumer sentiment surveys continued to a point to a souring mood given the uncertainty and this week was the first time we saw some major companies begin to cut guidance, specifically citing a reduction in consumer and corporate confidence.

The week started with a burst of downside momentum with the S&P 500 falling nearly 3% on Monday reversing all of last Friday’s late day rally and taking the S&P 500 decisively back below its 200d moving average. The mega-cap tech stocks led to the downside with the NYSE FANG+ falling nearly 5%. The complexion of the trading shifted on Tuesday with the mega-cap techs stocks and some of the AI related stocks trading well following positive demand commentary from Oracle overnight. However, the weakness within markets shifted to areas impacted by consumer spending after multiple airlines cut guidance ahead of an investor conference and there was round of cautious commentary by retailers.  

Wednesday was a mixed session following the inflation data but there were signs that conditions were starting to get to extremes with RSI (Relative Strength Index) in the S&P 500 moving below 30 for the first time since October of 2023. The VIX futures curve also moved into backwardation, which means that traders were paying more for near term protection, a condition that has historically preceded at least a short-term bounce. In addition, the defensive stocks that had been outperforming turned lower.

However, the mood soured again on Thursday in a downright ugly session where there was pretty much no where to hide, leaving the S&P 500 down >4% for the week and taking the index into correction territory down 10.5% peak-to-trough. 

Today there was finally a snapback rally helped by some modestly positive commentary on trade last night, the avoidance of a government shutdown, speculation of further stimulus in China and some hope of a Ukraine resolution. The gains were persistent throughout the day outside of a brief response to another very negative consumer sentiment survey. Notably absent today…..headlines out of Washington to undercut the positive vibes. 

Despite the S&P 500 rallying 2.1% today the index closed lower for the fourth consecutive week down 2.3%. If Mr. Market is in a festive mood on St. Patty’s Day, it will be the first time the index has closed higher in back-to-back sessions since the middle of February. The streak of intraday ranges exceeding 1% is now at 16 and counting thought the VIX did pull back to ~22 after approaching 30 earlier this week. Most other major indices were down ~2% for the week. The Dow Jones Transports Index was a big underperformer down >6%. The airlines accounted for much of that, but truckers and rails were also sharply lower as multiple investment shops increased their probabilities for a recession. 

Valuations were elevated coming into the year but so were earnings expectations. At then end of Q3 Wall Street projected EPS to inflect higher with estimates for EPS growth rates of ~15% y/y for companies in both the S&P 400 and 500. Despite a very solid Q4 earnings season companies seemed to err on the side of caution issuing conservative guidance given the uncertain environment. This led to some negative revisions to those estimates which have now fallen to ~12% for the S&P 500 and been cut all the way down to ~9% for the midcaps. We’re only about a month out from the start of Q1 earnings season so we’re getting into the prime pre-announcement window. We’ll see if this week was a seminal moment in that regard.  There are a bunch of sell-side investor conferences next week and a couple of big companies set to report on Thursday night (FDX, LEN, MU, NKE). If there are a wave of negative pre-announcements over the next couple of weeks those estimates will need to move lower. 

There weren’t too many places to hide throughout the week. Energy was the best performing sector after rallying nearly 3% today. Utilities were also higher on the week led by the IPP’s and companies levered to increasing power demand. Communication services and consumer discretionary were down ~3.5% the weakness wasn’t just in the mega-cap tech stocks in those groups it was pretty broad-based. Within the latter travel-related, restaurants, specialty retail and apparel all got hit. Auto-related stocks modestly outperformed. Most other sectors were down ~2% for the week. 

Global Markets -broadly global indices continued to outperform US markets. 

This week’s economic data was largely focused on inflation but before we move there let’s just wrap up the labor market data. In a rare occurrence the JOLTS Job openings came out after the BLS Employment report. The report showed an uptick in open jobs to ~7.74ml from ~7.51ml last month. The ratio of job openings to unemployed remained around pre-Covid levels (Chart 1). My focus within this report was on the separations which ticked modestly lower and remains well below the averages seen over the last twenty years (Chart 2). This week’s initial jobless claims data held steady ~220k while there was a modest downtick in continuing claims. None of this data points to a significant decline in the labor market.

Moving to inflation. Headline and core CPI both came in a tenth better than expected. Headline was up 0.2%/2.8% down from 0.5%/3% last month. Food prices moderated to up 0.2% from 0.4%.  Food at home was flat m/m after jumping 0.5% last month but would have been lower had it not been for egg prices. Core also moderated up 0.3%/3.1% down 0.2%/3.3% last month with both goods and services lower than last month. On the goods side, new vehicles surprisingly declined 0.1% ahead of potential tariffs while used cars also moderated significantly unwinding some of the big increase last month which we highlighted may have been impacted by storms/wildfires. On the services side shelter dropped to 0.3% from 0.4%. Transportation services fell -0.8% after a big jump last month driven by a 4% decline in airline prices which were down 4%. Also notable was the decline in motor vehicle insurance, which has been a big driver of inflation, which moderated to 0.3% from 2% last month. 

PPI also came in better than expected with headline flat m/m while core fell 0.1%. 2/3 of the increase in the index for final demand was attributed to eggs. There wasn’t significant cooling in medical insurance (0% prior -0.1%) or portfolio management (0.5% prior 0.5%) which feed into PCE.

This week’s inflation data came in better than expected but markets largely shrugged off this data in part to the fact that expectations for rate cuts have shifted so dramatically recently. The data is positive from a Fed perspective on the margin, as it won’t necessarily take the prospect of rate cuts off the table, but the Committee will want to see further disinflation before they move unless economic activity slows significantly. In addition, some of the components that feed into PCE, the Fed’s preferred gauge of inflation, did not cool as dramatically as the headline numbers. The other dilemma for the Fed was prevalent in today’s data. 

The University of Michigan Sentiment Survey fell for the third consecutive month reversing all of the gains in the back half of last year with broad declines irrespective of political affiliation. The biggest issue is that inflation expectations also continued to move sharply higher with 1yr expectations jumping to 4.9% from 4.3% while 5yr expectations jumped to 3.9% from 3.5% and this is happening as oil prices are falling which is usually highly correlated. Those readings are running much hotter than the New York Fed’s inflation expectations which were 3.1% and 3% earlier this week and the market-based inflation expectations (see Chart). 

Next week is the FOMC policy meeting. As I discussed last week, I think the Fed is currently a distant second, third or fourth in terms of issues that the market is focused on currently. The Fed is widely expected to leave rates unchanged next week and I’d expect Chair Powell’s commentary to be consistent with what he said last Friday. Pointing to a solid economic backdrop and acknowledging the uncertainty which could slow activity. On inflation the Committee will want to see more evidence that inflation is moving back to target, and he’ll surely be pressed on the increase inflation expectations. I’d also expect him to reiterate that the Committee is in no “hurry” to alter monetary policy and that they will want to see the impact of Washington policy before adjusting that stance. Given how aggressively markets have repriced it would be hard for his commentary to be more dovish than that. 

The Summary of Economic Projections will be updated. I don’t have a great read on the economic projections given the amount of uncertainty, but I don’t think there will be a change to the DOTS which previously pointed to 2 rate cuts the longer run rate could continue to tick higher. Investors will be listening for clues for when QT will wind down with current expectations around mid-year. 

Yields were essentially unchanged for the week stabilizing after the recent moves lower. 

We have started to see credit spreads widening out over the last few weeks. Below is the OAS Spread for US HY in Chart 1 but you need to look at Chart 2 to keep things in perspective. 

March Madness officially begins next week but it feels like we've had an early jump on that. Hopefully markets are in a festive mood on St. Patty's Day and we can string together our first back-to-back green sessions in a month. Retail sales and Empire Manufacturing the first of the March regional surveys will help to set the tone. There is also a economic data dump in China and the aforementioned press conference. Otherwise the economic calendar is a bit lighter with the highlights housing related and industrial production. There are multiple major central bank rate decisions including the BOJ, Fed and BOE. Expectations have quickly ramped up ahead of Nvidia's GTC conference with Jensen Huang's keynote address on Tuesday. The week will end with a big liquidity event as it Triple Witch Expiration and the S&P quarterly index rebalances. Have a great weekend!.

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