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Tariffs, Inflation, and Market Jitters: A Volatile End to Q1
As the first quarter closes, market volatility remains high, fueled by inflation concerns and newly and yet-to-be announced tariffs. The White House introduced a 25% tariff on non-U.S. autos, set to take effect on April 3, a day after the broader reciprocal tariffs. While these measures aim to level the playing field, they have rattled investors, with auto stocks and international markets taking a hit. Given that half of all U.S. car sales come from imports, higher consumer prices and disruptions in the auto industry are likely. Downstream effects on used vehicles, repair costs, and auto insurance will ripple through the economy for years. Rental car stocks, however, surged on expectations that rising vehicle prices would boost the value of their fleets.
Beyond autos, inflation is proving stubborn, with the Fed’s preferred inflation gauge (the core PCE price index) rising 2.8% year over year. Consumer confidence has tumbled, with the Conference Board’s expectations index hitting a 12-year low, signaling rising concerns about the economy and labor market (more on this in the Recommendations section).
Business activity expanded in March, but future outlooks darkened as companies worried about tariffs and inflation. Meanwhile, the S&P 500 experienced a wild ride this week. After jumping nearly 1.8% early in the week, markets tumbled 2% on Friday as tariff concerns and inflation data spooked investors again. Growth stocks struggled, while value stocks extended their winning streak to six weeks.
What This Means for Investors
The outlook still remains uncertain, but there are reasons for optimism. Corporate profits are still rising, unemployment remains low, and the Fed is in a wait-and-see mode. Rate cuts are still on the table although the committee has broadly differing opinions on the future.
While a swift market rebound seems unlikely, historical trends suggest that volatility can create buying opportunities. Maintaining a balanced portfolio with exposure to sectors less affected by tariffs, such as financials and health care, could help navigate the turbulence. Consumer Discretionary is getting hammered. Diversify your diversifiers and maintain a strategic allocation as the market braces for further policy developments and economic shifts in the months ahead.
Market Activity
Gold is on a tear, while risk assets got punished this week after a rough Friday close. Tariff headlines sparked renewed anxiety, short-circuiting the positive trend earlier in the week. Treasuries rallied late in the week on expectations of slowing growth. The gap between the 5-year and 30-year is the widest since 2022, as the middle of the curve has caught the most interest from investors.
Also, CVS (+50.6% YTD) is crushing the market right now. The other two in the top three are Newmont (+30%, gold mining) and Philip Morris (+28.8%, tobacco). What a crew.
Stocks
Fixed Income
Economic Reports
As per usual, economic reports were mixed. The bad news makes headlines, and the good news isn't good enough. PCE ticking up to 2.8% YoY is concerning, as inflation continues trending in the wrong direction. Services PMI, and durable goods are bright spots. Initial jobless claims have been steady, but continuing jobless claims are slowly rising.
Consumer confidence/sentiment is weird right now. I talked about it last week and again below.
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Earnings Releases
MKC added a little seasoning to an already interesting week. LULU stretched investor expectations, but many are trying to see through to the next quarter due to worries over consumer spending. 👏👏 I’ll be here all week.
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Recommendations
Watch What They Do, Not What They Say
- Did Bears Overextend Themselves? | James Bianco makes the case that uncertainty measures, sentiment swings, and doubts about American Exceptionalism have all been overdone.
- Ignore The Collapsing Soft Data: Bank Of America Says "Watch What They Do, Not What They Say" | Vibecession 2.0? [Key BofA chart included below].
- Throwback: Don't Listen to What People Say. Watch What They Do |
FOMC Watcher
- Stagflationary risks will slow the Fed down | Do you smell what the Fed is cooking? Claudia Sahm discusses the whiff of stagflation in the air.
Leave Me A-Loan
- Americans See Growing Risk They’ll Get Turned Down for Loans | Bloomberg covers the unsettling growth in rejections for secured and unsecured debt.
- Credit Score Impacts from Past Due Student Loan Payments | Student loans borrowers are worse off and in more precarious situations than before the pandemic. Lower scores = higher loan rates at a time when rates are already the highest in decades.
Crypto is for ___
Via
Chart(s) of the Week
More evidence that the hard data and soft data (at least so far) are not aligned. Whether it is fear, politics, or foreshadowing, we won’t know for a little while but there is growing evidence that the soft data is overblown. The market appears to be looking past this even despite our recent two-day drop. If the market, earnings, and economy was mirroring the sentiment, we’d be down a lot more.
Via ZeroHedge
Sentiment is by nature subject to political bias in our current environment. Is this weighing on the survey results? Well, lets look at the March data on Consumer Expectations for Democrats specifically. At 27.9, this is 31% lower than the lowest single reading from any group during the GFC (2008 & 2009). It also exactly matches the Republican reading in July 2022. Both parties are a bunch of crybabies and it is calling into question the usefulness of this and other surveys.
The degree of disagreement on the committee is remarkable, with FOMC members projecting a range between 2.5% and 4%. Consumers aren’t the only ones who are discombobulated. Most importantly, none of the FOMC members are predicting a sharp decline in the Fed funds rate to zero, telling the market that nobody on the FOMC is expecting a recession yet.
Source: FOMC, Bloomberg, Apollo Chief Economist