'A little disturbance'

This week I toggled between the Delaware and Pennsylvania border with advisor and investor meetings on a very sunny day. Apparently it IS always sunny in Philadelphia! Delaware, our country’s first state, boasts a lot of history (Revolutionary War cemeteries) and the highest advisor count per capita in the US (perhaps owing to (still) lots of corporate headquarters). Here, I spoke to several women's groups for a largely women-populated advisor team headed by a fierce lady! No investor panic here, even as the decline in the S&P 500 finally crossed the 10% correction threshold on Thursday. The Magnificent Seven has been hit particularly hard; it now comprises (a still-high) 30% of the S&P 500 versus 34% last summer. On an equal-weighted basis, the S&P 500 is down just 6% over that period, highlighting the specific quality of the correction. This has been the fifth-fastest 10% correction for the S&P 500 (just 20 days) since 1950. But the drawdown’s magnitude is right in line with the median S&P 500 correction of 10% over the past 25 years. Indeed, the decline has been fairly orderly, with no clear capitulation. As a rule, corrections last longer than this (two months), so we might expect volatility to continue. Earnings estimates have been revised downwards for Q1, as often happens, with the consensus now calling for 6.8% y/y EPS growth versus 11% at the start of the quarter. But importantly, full-year earnings are still expected to grow 10.2%, just above last year, not yet factoring in even a slowdown in growth. All but one of the 11 S&P 500 sectors enjoyed positive y/y earnings growth in Q4. And we are talking recession?! 

Still, though Trump warned of a “little disturbance” in his speech to Congress, he refused to dismiss the possibility of a recession. Numerous Wall Street economists increased their odds of a recession, from JP Morgan Chase, which went from 30% to 40% to the sunnier Goldman Sachs, which now sees a 20% chance of a recession in the next 12 months versus 15% previously. Even the bullish Ed Yardeni raised his odds to 35%. He sees stock market vigilantes at work in this correction, objecting to tariffs and to the DOGE cuts, out of concern that they may be stagflationary. Strategas reassures us that stagflation is rare and unlikely. Still, Google Trends show that we’ve recently had the third-highest spike in searches for “stagflation” since 2004. Similarly, searches for “recession” are way up, and the District of Columbia in particular has seen a spike in that search term. But the major asset classes are not in agreement as to the risk of a recession—credit spreads, notably, remain fairly tight (if rising somewhat lately). Efforts at improving government efficiency sound benign in the abstract, but even if the direction is beneficial a sudden change could harm the economy in the short term, something Treasury Secretary Bessent calls “detoxification.” Markets are worried that a governmental detox and, especially, tariff uncertainty could slow the economy to stall speed.    

S&P 500 firms made fewer mentions of “recession” in Q4 earnings calls than in any quarter since early 2018, according to FactSet. What’s more, share buybacks are up, per Bank of America, not indicative of management teams foreseeing trouble. The VIX has risen, but so far, the selloff has not been chaotic, suggesting that it won’t get out of hand. Strategas worries that credit card data may show the consumer is low on gas, perhaps indicating a shallow recession. But if there’s no recession, the weakness should be over by mid-spring. Sentiment data points away from a downturn, with the Investors’ Intelligence bull/bear survey showing a bearish majority for the first time since 2022. As a contrary indicator, this suggests better times ahead for stocks. JP Morgan says that within equities the correction has more to do with quants adjusting their positions than with fundamental analysis. Policy uncertainty is another contrary indicator and it’s at a post-Covid high. On the bright side, Gavekal posits it's quite likely that Trump’s policies and foreign reactions to them could end up leading to expansionary fiscal policies across much of the world. This is already happening in Europe and China. And, Gavekal adds, “Despite Musk’s efforts, the US fiscal deficit may well expand rather than shrink.” As to Trump’s insistence of equity indifference—“I’m not even looking at the stock market”—I call hogwash.

Positives

• January JOLTS indicate solid labor demand at the end of January, with job openings rising to 7.7 million from 7.5mn in December, beating consensus (7.6mn), and in line with Q4 ‘24 (7.7mn). This reading amounts to 1.13 job openings per unemployed person, somewhat below pre​-​pandemic readings in the vicinity of 1.2. The rise in private job openings was in every sector except business services and leisure/hospitality. Government job openings edged up, but are expected to tumble the next few months. Piper Sandler says the most relevant economic signal here is the still quite high headline quit rate, up from 1.9% to 2.1% m/m, and the private quit rate, up to 2.3%.
• The headline Producer Price Index was unchanged in February, following a 0.6% increase in January, and below consensus (0.3%). Prices for final demand goods advanced 0.3% over the month, a step down from the 0.5% to 0.6% range for the previous three months. Core PPI excluding food, energy and trade services rose 0.2%, down from 0.3% in January and below consensus expectations (0.3%). Trend Macro notes that an unchanged PPI confounded expectations for pre-tariff pre-emptive buying.
• Not so bad The NY Fed’s report on consumers’ inflationary expectations over the next 12 months showed a much more subdued response to tariffs during February than did the Consumer Sentiment Index survey. The former reported the one-year ahead expected inflation rate at 3.1%, while the latter jumped to 4.3%. Yardeni suggests that these are certainly not stagflationary readings.    

Negatives

• Really bad! University of Michigan preliminary March consumer sentiment broadly plunged, with inflation fears jumping. Headline confidence slid 6.8 pts m/m to 57.9. Current conditions dropped 2.2 pts to 63.5, with expectations down a large 9.8 pts to 54.2. Sentiment fell across all age, education, income, political, and geographic groups in mid-March. One-year inflation expectations rose from 4.3% to 4.9% (forecast 4.3%), the highest since November 2022. More concerning, 5-10-year inflation expectations rose from 3.5% to 3.9% (forecast 3.4%). This would mark the highest level and largest one-month increase since February 1993 if it holds in the final print. Interestingly, long-term inflation expectations varied across political affiliations, at 4.6%, 3.7% and 1.3% for Democrats, Independents and Republicans, respectively.
• Small businesses are as confused as we are NFIB’s survey of small business optimism declined 2.1 points in February to 100.7, below consensus (101.0), as uncertainty jumped back to its second-highest reading on record, noting many small firms will be hit if government contract funding is cut. Surprisingly, the net percent of firms citing inflation as their single-most important problem slid to 16, a fresh low. Firms are reporting an improved credit backdrop. The net percent reporting that credit was hard to get slid to a fresh low of 2 in February. However, optimism remains elevated as businesses say demand is still solid.  Indeed, the NFIB index is still quite elevated compared to the 91.0 average which prevailed pre-election in 2024 and is above its long-term average of 98 for the fourth consecutive month. NFIB is a good proxy for middle income consumer confidence, itself a tell for broad consumer spending.
• Stalled out February’s pre-tariff headline and core CPIs were encouraging, both up just 0.2% m/m, vs. an expected +0.3% for both. (Y/y headline and core up 2.8% and 3.1%, respectively, vs. 2.9% and 3.2% expected.) But this was mainly due to airfares plunging 4.0% m/m. Otherwise, CPI inflation remains broad-based. Shelter prices seem stuck at a 0.3% m/m pace, with the Zillow rent index indicating they’ve probably bottomed at 0.3%. Interestingly, food at home was flat despite the surge in egg prices. Based on the CPI and PPI reports, Bank of America expects that core PCE rose by 0.3% m/m (2.7% y/y), indicating progress on inflation continues to stall.

What Else

Germany really needs this Deutsche notes Germany has seen close to zero real GDP growth over the last five years, putting it near the bottom of the global growth league table. The announced fiscal package being debated will boost growth significantly if and when implemented. The reforms required include a reduction in bureaucracy, an improvement in innovation dynamics and a strengthening of the labor market—Germany has the lowest hours worked of any OECD country, at 26 hours per week on average (2023 data).

Businesses would love this Treasury Secretary Bessent told the Economic Club of New York last week that the administration is considering full expensing for factories. Under present law, buildings are depreciated over a 39-years; fully expensing them in the first year would significantly increase the attractiveness of structures investment and onshoring. This policy would likely be in lieu of Trump’s idea for a 15% rate for domestic manufacturing.

What to make of this? With their office utilization index back to post-pandemic highs, Trend Macro wonders if DOGE is driving remote workers back to their offices. Maybe so, but Manhattan apartment rents reached a record high in February, with a median of $4,500, up 6.4% from last year, according to Bloomberg reporting. Almost 27% of last month’s new leases were signed after bidding wars, a record share.