Weekend Update #221
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The S&P 500 entered a correction this Thursday, falling 10.1% since February 19th due to growth concerns and economic uncertainty, but markets saw some relief in trading on Friday. President Trump said this week that the economy faces “a period of transition”, leading market participants to believe the government is not yet ready to step in with stimulative measures in response to recent market weakness, driven by fears over the impacts of new tariff policies. On Tuesday, the president announced 50% tariffs on Canadian steel and aluminum, only to walk that back to 25% tariffs later in the day. With a lack of clarity on tariff implementation and uncertainty over any inflationary impact it may have, volatility spiked this week to a high since August 2024. With this week’s moves, the S&P 500 has lost $5 trillion worth of valuation since late February.
Friday’s Consumer Sentiment report for March showed that long-term inflation expectations surged to their highest level since 1993, 3.9%, while the proportion of consumers expecting unemployment to rise in the year ahead is at around 2 in 3, a high since 2009. The negative mix of weakening employment expectations, increasing inflation expectations, and increasing uncertainty around the economy are likely to cause a cutback in consumer spending in the year ahead, the University of Michigan writes. Overall, the sentiment index plunged 11% this month.
In other economic data this week, there was some relief from positive job openings, CPI, PPI, and jobless claims reports, but the data from January and February were not enough to calm a fearful market that perceived further growth slowdowns ahead. NFIB’s Small Business Optimism Index showed that business uncertainty rose to the second-highest level on record while negative impacts from inflation and difficulty securing sufficient labor quality were key issues for small businesses. The JOLTS report showed job openings surpassed economist expectations at 7.6 million in January, which gives the labor market a better base to absorb weakening employment expectations. February’s CPI report showed a fall to 0.2% month-over-month and 2.8% year-over-year, compared with January’s respective 0.5% and 3.0% readings. The PPI report also showed 0.0% month-over-month growth in February and a -0.1% reading on the ex-food and energy measure, coming in cooler than estimates. Initial jobless claims were 220,000 for the week ended March 8th, compared to economists’ estimate of 225,000, continuing an improving trend since January 25th.
Going forward, evolutions in tariff policy and incoming data on inflation, confidence, and consumer spending will all be key guiding factors for markets. So far, corporate earnings have remained relatively resilient through Q4 2024, but in more recent earnings calls, various management teams have cited economic uncertainty as impacting sales expectations going forward.
Friday’s Close (Weekly Performance)
S&P 500 5,638.94 (-2.27%)
Nasdaq 17,754.09 (-2.43%)
Dow Jones 41,488.19 (-3.07%)
Thank you Blue Room Senior Analyst JARED FENLEY.
Cooler-Than-Expected Report
CPI in February 2025 cooled significantly across metrics from the January report, an encouraging sign of muted price pressures in anticipation of tariffs. However, the report alone was not enough to significantly change the market trajectory this week in the face of tariff measures and growth risks.
Inflation in shelter costs continued to trend favorably, rising 4.3% YoY, a new low since December 2021. Food inflation overall also slowed despite egg prices advancing 10% MoM and 59% YoY.
Consumer sentiment slid another 11% this month to 57.9, with declines seen consistently across all groups by age, education, income, wealth, political affiliations, and geographic regions.
Sentiment has now fallen for three consecutive months and is currently down 22% from December 2024.
While current economic conditions were little changed, expectations for the future deteriorated across multiple facets of the economy, including personal finances, labor markets, inflation, business conditions, and stock markets.
Many consumers cited the high level of uncertainty around policy and other economic factors; frequent gyrations in economic policies make it very difficult for consumers to plan for the future, regardless of one’s policy preferences.
Consumers from all three political affiliations are in agreement that the outlook has weakened since February. Despite their greater confidence following the election, Republicans posted a sizable 10% decline in their expectations index in March. For Independents and Democrats, the expectations index declined an even steeper 12% and 24%, respectively.
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