I thought that Chair Powell was impressive at the FOMC March 20th, press conference. He came across as very balanced, cautious, and data-dependent. Clearly, these are not easy with the chaos emanating from the executive branch, and handling an economy that was headed for a soft landing which now may get derailed needs kid gloves.
Chair Powell paid heed to the soft data – forward-looking surveys for inflation and tariffs from sources like the Michigan Consumer Sentiment Index and the PMIs; data that points to softness and uncertainty in the economy borne out of tariffs, deportations, and higher inflation expectations, which all seemed under control just a few months back. He balanced it with what’s showing up as reported, which is nowhere as bad, clearly the surveys are just leading indicators for now.
The Fed’s revised numbers for 2026 are as follows:
Inflation 2.8% from 2.5%
GDP lower at 1.8% from 2%
The Unemployment 4.4% from 4.3%
Given that the softer surveys are not showing up in the reported numbers yet, the proposed strategy is to wait and watch.
When pressed about why he’s going ahead with two rate cuts when clearly inflation is not below the 2% objective, he stressed the Fed’s dual mandate of full employment – which needs cuts in the face of a weakening economy, and tariff uncertainties.
Similarly, he also stressed that the weaker data wasn’t yet showing up in the job numbers, which meant that they were in no hurry to cut, but were ready and willing to act as required.
I believe the markets heaved a sigh of relief that they haven’t called for more or earlier cuts: I agree with the notion that they’re going to live with higher inflation but not let the economy falter. It is the right way to go. The S&P closed 1.17% higher for the day. At least its moving up from correction territory.
The word transitory came up, a bad penny that’s never left Chair Powell. I understood it as transitory similar to Trump’s first term, in the sense, that they still don’t know the impact. He emphasized that it’s not “transitory” like the mistake they made post-COVID in 2021, and scrambled to raise the rates in 2022. That seems fair.
The bottom line – a lot of ponderables, and moving parts. Clearly, we’ve got our work cut out to make money in 2025! Many have never seen a stagflationary environment and to be sure it is going to be tough navigating it.
In the shorter term, I would expect the S&P 500 to rise a bit more, there is the 200DMA hovering at 5,705, which is a key resistance level – hopefully, we clear that before the PCE next week.
Consumer Sentiment Soured With Inflation and Layoffs
Market Outlook – Consumer Confidence
Consumer confidence slumps more than consensus in February, with the index coming in at 98.3 vs. 103.0 consensus and 105.3 in January (revised from 104.1), according to data released by The Conference Board this morning,
The drop was severe, and the most since August 2021 on concerns about the outlook for the broader economy – uncertainty over the Trump administration’s policies weighing on households.
I had posted on Friday, stating that a plethora of weaker economic indicators was likely to lead to a drop in the market and this one added to the market’s woes, which at writing was down about 1% to 5,940 – some 3% lower than its high of 6,147.
The Conference Board’s gauge of confidence decreased by 7 points in February to 98.3, the third straight decline.
The expectations index ( 6 months) sank 9.3 points to 72.9, the most in three-and-a-half years, while a gauge of present conditions declined more modestly 3.4 points to 136.5
Recession woes and worsening outlook: The drop in confidence was broad across age groups and incomes, with consumers more pessimistic about current and future labor-market conditions, as well as the outlook for incomes and business conditions. The DOGE cuts are not helping confidence for sure.
“In February, consumer confidence registered the largest monthly decline since August 2021,” said Stephanie Guichard, Senior Economist, Global Indicators at The Conference Board. “This is the third consecutive month on month decline, bringing the Index to the bottom of the range that has prevailed since 2022. Of the five components of the Index, only consumers’ assessment of present business conditions improved, albeit slightly. Views of current labor market conditions weakened. Consumers became pessimistic about future business conditions and less optimistic about future income. Pessimism about future employment prospects worsened and reached a ten-month high.”
The dreaded R-word, which had been buried under the AI boom resurfaced, – the share of respondents expecting a recession in the next year rose to a nine-month high.
Tuesday’s report reinforces other surveys that I had cited, showing a doubtful and hesitant populace, waning after an initial surge of animal spirits post-election. Tariffs and higher prices dominate the conversation, as they did in the Michigan sentiment survey, as inflation pressures pick up again and the labor market suddenly looks shaky. One would wonder if the DOGE leadership thought through their actions and the effects on the economy with all the government layoffs. Clearly, the mood seems to have soured.
I continue to be extremely cautious, and will only buy exceptional bargains, I believe the S&P 500 could correct to 5,780 – the pre-election level, after which I would re assess the market before entering again.
There has been a spate of economic indicators in the past week or so, which are bearish for the market indicating a possible correction or at the very least a level of caution.
Let’s take a look.
The PMI – The Purchasing Manager’s Index – a 17 Month Low!
The index fell to a 17-month low at 50.4 in February, down from 52.7 in January, indicating that activity had slowed to a virtual standstill. Worse, cost inflation accelerated even with the lower activity, and was absorbed by suppliers who were unable to pass it on – indicating a possible stagflationary spiral.
Economists didn’t see it coming with expectations of 53.
It also marked the slowest pace of business expansion since September 2023, driven by a renewed contraction in services output that partially offset faster manufacturing growth. New order growth weakened significantly, while employment edged lower amid rising uncertainty and cost concerns.On the price front, input cost inflation accelerated to its highest level since last September, while selling prices saw their slowest increase in three months. Finally, business optimism about the coming year slumped to its lowest since December 2022, except for last September, amid concerns over federal government policies related to domestic spending cuts and tariffs, as well as worries over higher prices, and broader geopolitical developments.
The University of Michigan’s consumer sentiment index fell to 64.7 in February from 71.7 in January. Economists polled by FactSet were expecting a much better 67.5.
Year-ahead inflation expectations rose to 4.3% from 3.3% in January. This is a worrying sign, high inflation expectations hurt the mass consumer and spending.
Tariffs are scaring consumers as all five index components weakened this month, with durables lower by 19% mostly on ears that tariff-induced price increases were imminent.
Year-ahead inflation expectations jumped up from 3.3% last month to 4.3% this month, the highest reading since November 2023 and marking two consecutive months of unusually large increases.
Current Conditions Index: 65.7 vs. 68.7 expected and 75.1 January.
Consumer Expectations Index: 64.0 vs. 67.3 consensus and 69.5 prior.
Existing home sales of 4.08Mn also came in below expectations at 4.11Mn.. Economists surveyed by The Wall Street Journal had estimated a monthly decrease of 2.6%. In 2024, home sales fell to the lowest level since 1995 for the second straight year.
First-time home buyers seemed to be priced out by the double whammy of higher prices and high mortgage rates. I had reported earlier that the brave home buyers from 2022-2024 would feel the pinch of not getting to re-finance their 6-7% mortgage and clearly, few takers are willing to take that risk now.
Cash is at a record low:
According to the BOFA Global Fund Manager survey, cash is at 3.5% – the lowest level since 2010!
That begs the obvious question? With only 3.5% cash what’s left to buy the dip? With over-ownership of the M-7, these stocks aren’t just overbought, a) There’s previous little cash left to buy when the prices get attractive and b) You already own all of them, where’s the room to add more?
We could be in a fading, twilight of a bull run and headed for a correction according to Scott Rubner, managing director for global markets and tactical specialist at Goldman Sachs.
Rubner was categorical in stating the good times from corporate buybacks, retail investors jumping in on every dip, 401k inflows, and beginning of the year investing was waning, and once the corporate buyback period went into the quiet period for Q2, fund flows would move away from equities.
According to Rubner:
“My highest conviction is that this massive ability to buy dip alpha is starting to wane.” Rubner also said that hedge funds have allocated a lot of risk back into the market. Global equities saw the largest net buying in two months last week.
Rubner backed his findings with two key statistics; His assessment that computerized trading desks selling triggers, in the event of a market dip would unload $62Bn worth of equities compared to just $9.55Bn of buying on buying signals – pretty asymmetric towards the downside. Secondly, he also cited “A net retail buy imbalance for the last 22 days, including the top three largest days on record, he said. “This cohort is happy to buy any 2-3% dips for now.”
Q4-24 Earnings weren’t good enough:
The FactSet report on S&P 500 Earnings on 02/14 was just average and for this market to keep rising average won’t do – the valuations The M-7, bellwethers were also sluggish and will have a hard time taking the indices higher.
And while I’m positive about AI, semiconductors, and several fundamentally strong tech companies, valuations have been stretched for a while, thus it would be prudent to take advantage of some of the prices by booking profits, which I have started and posted in the trade alerts section.
While a set of economic indicators doesn’t necessarily doom the market, the downside surprise indicates that we’re not paying enough attention to economic weaknesses, against a backdrop of stretched valuations and interest rates that refuse to fall. The correct de-risking strategy would be to sell and keep cash available for better bargains.
Bonds Rally: The US 10-year treasury yield drops 14 basis points from 4.8% to 4.66%
The S&P 500 rallies 1.83% to 5,950, and the Nasdaq Composite zooms 2.45% to 19,511
CPI Data Signals Cooling Inflation in Good News for Fed
US Dec. consumer prices rise 0.4% M/M; Est. +0.4% The broader Consumer Price Index (CPI) matched expectations and rose 2.9% in December from a year earlier.
The benign numbers were in the Core CPI, led by shelter inflation, which was sorely needed.
Core prices rose 0.2% in December, less than the 0.4% estimated and 3.2% from a year earlier, down from 3.3% in November – an unexpected decline, which sparked the bond and stock rally.
Prices for shelter, airfares, used cars and trucks posted gains. Airfares were the outlier rising by 7% and gas prices also rose 4% MoM
Shelter inflation remained moderate, coming in at 0.3% on the month, a big sigh of relief for the Feds – shelter inflation is the stickiest and the hardest to reduce. The shelter index rose 4.6% YoY, the smallest annual increase since January 2022.
US government bonds rallied strongly, reviving hopes of additional Federal Reserve interest-rate cuts, which were down to a total 29 basis points cut for the whole year.
As the rally progressed Treasury yields across maturities fell by at least 10 basis points and closed with 10-year yields falling as much as 15 basis points to 4.65% for its biggest daily decline since August.
What a turbulent month so far – and all this before Trump is sworn in. The drop in yields reversed the sharp rise from a strong December employment data released Friday, which sparked a surge toward the highest levels in months to 4.81%, all but confirming that the Feds may not cut rates at all this year. At 4.81%, the 10-Year was a 100 basis points higher than when the Fed began easing in September.
Sometimes, you get the feeling that the inmates are running the asylum after the two-day fiasco in Washington sent the government into a temporary shutdown without passage of any stop-gap funding. Not that it hasn’t happened before; we’re all too familiar with and cynical of the antics of our esteemed elected officials, but the drama is causing serious damage to an already rattled market.
The S&P dropped 2% overnight after a smaller stop-gap funding bill rushed through by the GOP in the house failed to secure enough votes with a large number of Republicans opposing the bill as well. Briefly, Musk had torpedoed an already agreed bipartisan stop-gap bill, which would have kept the government funded through March 2025, because it did not include a debt ceiling increase and far too much pork. Republicans scrambled to put together a much smaller bill including a debt ceiling increase, but couldn’t get enough representatives on board, and this time a betrayed democratic side didn’t lend a hand.
As we barrel through the uncertainty, already exacerbated by a rising 10-year yield and the likelihood of only two cuts next year, the huge drop in overnight futures suggested that the S&P could break 5,872 and completely erase the post-election rally. Everybody appreciates the animal spirits, lower taxes, lesser regulation, and so on, but it comes with the price of high drama! No free lunches…
Slightly better than expected inflationary numbers with the core PCE rising 2.8% YoY against the 2.9% has stemmed the fall a bit. I had planned to buy the dip – may get some of my limit buys today, or even lower them.
Though this is a far less onerous shutdown. In a shutdown, government offices continue essential work, but tasks deemed nonessential are put on ice, paychecks stop and many workers are furloughed until Congress passes new funding. The impact of a shutdown varies, critical services continue, as would military and border-control functions. But, most federal workers, whether essential or not, won’t receive a paycheck. Under a 2019 law, workers will automatically get back pay when the shutdown ends. Private contractors who work with federal agencies and are furloughed during a shutdown aren’t guaranteed back pay.
How would this shutdown compare to previous ones?
From the Wall Street Journal “Congress has missed its deadline to pass 12 federal funding bills and failed to extend itself more time in about two dozen instances since 1976, but those lapses have often been short, with minimal impact.”
Quite the dysfunctional record but thankfully the impact has never been severe.
The Fed’s favored inflation gauge – core PCE – cools slightly in November
The core PCE Price Index, the Federal Reserve’s preferred inflation measure, edged up 0.1% M/M in November, less than the +0.2% consensus and cooling from the +0.3% pace in October. Personal income and spending also came in slightly lower than expected in the month.
On a year-over-year basis, core PCE increased 2.8%, just under the 2.9% consensus, and running at the same pace as in October.
PCE Price Index, which includes food and energy, also ticked up 0.1% M/M vs. +0.2% consensus and +0.2% prior.
That measure translated to a 2.4% Y/Y increase, less than the +2.5% consensus, but slightly hotter than the 2.3% rise in October.
Personal income: +0.3% M/M vs. +0.4% expected and +0.6% prior.
Personal outlays: +0.4% M/M vs. +0.5% consensus and +0.4% prior.
At the time of writing, premarket S&P 500 Futures are down 0.6% after being down 1.5% overnight after the second stop-gap funding bill failed miserably to get through the House of Representatives.
As expected the Fed cut interest rates by 0.25% bringing the Fed Funds rate to 4.25% to 4.5% To be sure, this is a hawkish cut. The S&P 500 gave up its gains of 0.5% and has dropped 1.5% in a reversal as has the Nasdaq Composite, down a full 2% to 19,703.
The 10-year treasury yield has shot to 4.5%, a harbinger of how the markets believe that the Feds will have to pay more to finance the deficit, with analysts even talking of 5% – a rate seen last October.
The hawkishness stems from the FOMC Median 2025 PCE Inflation Forecast, which rises to 2.5% vs 2.1%
The median forecast of Fed policymakers for the benchmark rate for the end of next year is now 3.9%. That compares with 3.4% back in September. That suggests 50 basis points of easing compared with 100 basis points in September (including the impact of today’s rate cut).
Today’s cut means policymakers have now lowered their benchmark lending rate by a full percentage point since mid-September. The median estimate of Fed officials now sees just two cuts next year. Most folks were expecting three in the forecast.
Fed officials are tipping an unemployment rate of 4.3% next year a shade higher than the current 4.2%. Chair Powell in the conference that followed stressed that he wanted to ensure that labor markets didn’t get derailed when asked about the need to cut.
The Fed’s policy statement also alluded to a slower pace of cuts by saying “the extent and timing” of additional adjustments would depend on the outlook. This too was stressed in the conference that it would always be new data that would matter.
The neutral rate discussed (the rate at which the economy is neither inflationary nor disinflationary) is now 3%, higher than the original 2%, which the Feds were hoping to achieve by 2024, now highly unlikely before 2027.
Given the strength in the economy, with the GDP at 2.8% and projected to grow above 2% next year, a strong labor market with an unemployment rate of only 4.2%, this is not a bad call and regardless of how the market reacted, the caution to cut slower in 2025 is warranted in my opinion.
I’m sure you’ve been inundated with opinions on domestic politics, which is not usually a subject of this investing group. But politics is likely to affect our investment decisions so a note highlighting its impact on business is important.
So far, at, 5,994 the S&P 500 is up 5% from the Nov 4th close of 5,713, and from the forecasts of the likes of Goldman Sachs – we should be crossing 6,300 easily in 2025. Other forecasts have higher targets and we are seeing some of the traditional post-election bounce, a lot of short covering, lower volatility, FOMO, and so on…. It is a good time to be invested now.
There are a few policy areas that will affect equities.
Taxes – A big positive: The 2017 Tax Cuts and Jobs Act was due to expire on December 31, 2025. It lowered corporate and business income taxes, which was a big positive. The Biden administration was lining up a new set of “tax the rich” proposals, which are now dead. Given the proclivity of the new administration, we should see lower taxes.
Tariffs – A big negative: but could be mitigated: THESE WILL BE HIGHLY INFLATIONARY The Trump administration could impose tariffs at will by executive order, which is disastrously high. As part of an overall policy to rebalance trade with nations such as China, the tariffs will try to level the playing field. According to some of the administration’s policy papers, which are part of Project 2025, – granting MFN (Most Favored Nation) status seems to have resulted in chronic U.S. trade deficits with much of the rest of the world, at the expense of American manufacturing; an unfair practice with systemic trade imbalances serving as a brake on GDP growth and capping real wages in the American economy while encumbering the U.S. with significant foreign debt. This administration will point out China’s quest for global dominance, via protectionism, dumping, and so on, which though debatable, will be the bedrock of its tariff policies. (Who doesn’t love China bashing) The US is on the back foot regarding manufacturing and regardless of whether it is even feasible to reverse overseas manufacturing – this administration will go after it with a vengeance and tariffs will be their biggest tool to get manufacturing jobs back in the US. Tariffs ranging as high as 60% on Chinese goods, a 20% blanket tariff on all imports, and a 100% tariff on automobiles made in Mexico are possible impositions. THESE WILL BE HIGHLY INFLATIONARY Regardless of the eventual tariffs, they’re bad for some of America’s biggest companies such as Apple (AAPL), Nvidia (NVDA), and Microsoft (MSFT) that rely on Chinese manufacturing for hardware products. When Trump first imposed tariffs on Chinese goods, he made exceptions for certain consumer goods such as smartphones. Whether that will happen again is unclear. Besides, we have not even talked about retaliation from global competitors to whom America exports goods and services. Even as I anticipate tariffs to be a big negative, I’m hoping that wiser counsel prevails or perhaps the stock markets will swoon, which is reportedly a huge factor in this administration’s decisions, and not something they can control. Ironically, a stock market swoon may be the biggest reason for keeping tariffs under control.
Export controls: Some of it is already happening and is unlikely to get worse.
US technology with military applications is already banned from export. But if all exports of US-designed and engineered semiconductors, even those for consumer applications are banned it would hurt Apple, Nvidia, and Microsoft. But it would also hurt the trade imbalance that the Trump administration seeks to correct. Very unlikely.
ASML’s (ASML) EUV lithography machines could be a target if the Dutch government complies with restricting sales to allied countries such as Korea, Taiwan, and Japan. Again, unlikely.
Antitrust regulation:Positive for the markets – Under Biden, the government had lurched left, even trying to emulate the EU’s Digital Markets Act. The new administration will likely curtail some of the regulatory excesses, but we’ll have to wait and see if they try to undo recent antitrust litigation against Google (GOOG) and Apple.
Environment, energy, and inflation: More domestic drilling could be a positive, as more domestic oil reduces the need for imports, lowers gas prices, and could result in lower inflation. Its too early to comment on environmental policies and I’ll update at a later date.
Mass Deportation – Highly inflationary, when one finds it difficult to fill jobs that Americans are not willing to do. Again – I believe it to be more rhetoric and not likely to be administered en masse, I suspect this could be cosmetic.
For sure, we live in interesting times and the next 4 years should be a roller coaster.
