03/31/2025 Market Strategy
Keep the Faith Baby
More than Déjà Vu It Looks Like “Rinse and Repeat” for Experienced Investors
Key Takeaways
- World markets anxiously await the details of “Tariff Day” on Wednesday, April 2.
- Last week’s inflation data showed a surprisingly robust 0.4% monthly gain in the core PCE deflator–the Fed’s preferred measure. Inflation pressure was driven by higher health care and financial services costs.
- This week brings the first indications of economic performance for March with the ISM surveys of business activity as well as the nonfarm payrolls change and unemployment rate.
- Looking beyond this week, markets are likely to position in anticipation of the start of S&P 500 Q1 earnings season on April 11.
With tariffs on the minds of investors globally ahead of the April 2 implementation, some nervousness is bound to be expected in the markets this week. In addition, the week brings key economic US data for the month of March including the jobs and unemployment numbers along with data on wages, hours worked, and the labor participation rate.
Based on the markets’ behavior already experienced since the latest record high for the S&P 500 on Feb. 19, we’d expect that some degree of volatility could be ameliorated this week should the jobs number not disappoint, and for it to offset some of the recent soured sentiment towards stocks along with a proclivity for bears, sceptics, and nervous investors to predict stagflation, recession, and another leg down in market prices.
Last week’s “stickier than expected” inflation rate as measured in the personal consumption deflator (the Fed’s preferred inflation gauge) released last week cost the market some of the positive effect of two recent rallies in which around 90% of the stocks had closed higher and contributed to a positive pivot in investor sentiment.
Valuations and stock prices as of last Friday’s close suggest to us enough evidence of opportunity -- even as risk remains entrenched with the uncertainty surrounding “Tariff Day” and its potential effect on the stateside and global economies for investors to seek out babies that have been thrown out with the bathwater in the recent market drawbacks and reversals.
For one thing, intermediate and secular (longerterm) trends in technological innovation in our view are anything but over in a world where tech remains deeply embedded in the lives of both business and consumers. Our mantra surrounding quality and profitable technology companies along with the balance of the S&P 500’s sectors it will benefit remains “we’re all on the upgrade cycle whether we like it or not.”
Tech Stocks Repricing Underway
Looking back over the past five or so weeks since the market hit its most recent record high, a mixed bag of questions and concerns about valuation and what seems a plethora of uncertainties have pushed the market into correction mode (down -9.2% from this year’s peak) as of last Friday.
The move that has taken the index lower has been driven primarily by tech and tech-related stocks and has resulted in not just a few stocks representing companies of high quality and profitability respectively falling much greater percentages than the index.
Babies in the Bath Water?
Many of these stocks appear in our view to have been ruthlessly beaten amidst sectorrelated selling suggesting to us that they may sooner than later become eligible for solid rebounds given opportunity when Q1 earnings season gets underway as the big banks and other names begin to report Q1 results on April 11 -- less than two weeks from now.
The Market is Gaining Breadth
Notwithstanding the effects of a “shock and awe” approach to global trade reform policy and diplomatic protocol experienced of late there have been several days when 90% of stocks in the S&P 500 have moved higher on positive news flow or economic data that served to offset what we describe as a “negative pitch book” pandered by bears in the market that roils the fold in the day to day determination of the market’s direction.
Considering where we’ve been and what we’ve been through in the last seventeen years since the great financial crisis, the COVID-19 pandemic, the supply chain disruptions, and the inflation that followed too much fiscal stimulus -- where we are now may be not as bad as some say, and likely a period more like a proverbial rite de passage as monetary policy, trade policy, geopolitical risk, and conflagrations “break on through to the other side” on back of a period of negotiation where cooler heads prevail if only because the alternative is too awful and costly to consider for all sides.
To paraphrase the late John Lennon, “you may think that we’re just dreamers but we’re not the only ones…”
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