Feeling Green? Is It The Market or The Beer?

Weekly Newsletter: March 17, 2025

“Beware the Ides of March.” Given the past couple of weeks, it looks more like the markets got slaughtered than harm to Caesar. The last four weeks have seen the markets come down by 10%, with technology suffering most of the slings and arrows, dropping by roughly 20%. The economic news of the week was actually pretty good, with inflation figures a bit better than expectations and heading toward the Fed’s 2% target. Even the weekly jobless claims came in a range that indicates the labor market remains OK. Next up will be the Fed meeting and more importantly, the news conference with Chair Powell that follows. Will he bury the thought of future interest rate cuts and praise the economy, or acknowledge the Fed may have to step in to lower rates later this year? There will be plenty of questions about tariffs and the attempts to downsize the government and how they may impact the economy. The best guess will be that he deftly dodges the questions as the Fed tends to be more reactive than proactive in its policies. Without seeing the impacts of tariffs, which stick, for how long, and at what level, it will be difficult to assess the hit to the economy. Retail sales drop this week and based on commentary from various retailers, it may confirm the concern that the consumer is pulling back on their spending. As usual, there will be plenty to watch and many ways to interpret the data.

Stating the obvious, whether the market's current “correction” morphs into a full-blown bear market will only be known through the unraveling of time. Of course, a bear market is first a correction. A couple of bits of good news though. The current decline is roughly the median decline from peak levels in a given year. The recent streak of six trading days of a 1% move came to an end, marking the 26th time in history of that occurrence. History would argue that while the short-term remains a coin-flip, the long-term figures look much better than average. Finally, the quickness of the drop puts it in rare territory as well. Again, after the markets settle, higher prices soon follow. There will be plenty of data points and political turns before investors feel more comfortable that they can tip-toe back into stocks. Investor sentiment has followed the market as well, with some of the more bearish readings of the past decade. With sentiment so negative and selling so aggressive, it could be a good time to dabble in equities again.

The Fed will have the last word on interest rates this week, but rates have been steadily declining for much of the year. Not necessarily in response to lower commodity or inflation data, but likely over concerns that the economy is or will be weakening, requiring the Fed to act and cut rates. The recent inflation data supports the notion that there are “issues” with a historically “strong” inflation report in January. Last year had a similar footprint, a strong January report followed by more modest data. It is not likely that the Fed will cut rates this week, but they may set the table for when future rate cuts may come. Expectations are they could begin in May.

Value stocks did well during the recent carnage, however, the stars have been nearly everything overseas. The weaker dollar, combined with stronger international markets, has pushed up those returns this year. As the markets have fallen 5% in the US, international markets rose by 2-4%. The bigger question (always is!) can it continue? Certainly, the divergence between the US and international markets is at historically wide levels. They should do better in the years to come, but it will likely be dependent on a weaker dollar to make those returns look better. Closer to home, the divergence between large stocks to both value and small stocks is also historically wide. For those willing to be a contrarian, a tilt toward international, value, and smaller stocks could work out well. Given the dominance of the SP500 since the financial crisis in ’08-09, it makes some sense that that horse may need to take a rest. Gold has shone through as well, likely as investors grab the metal for a bit of safety amidst the turmoil. Historically gold has been one of three things, a store of value (inflation hedge), a hedge against a weak dollar, or a disaster hedge. The problem is that it is usually revealed by looking in the rear-view mirror. Over the past few years, it has been more of a dollar hedge than anything else. IF the dollar does continue to weaken, it may bolster not only international but also some gold holdings.

The Fed meeting likely will set the table for the next rate cut. It is expected to be in May, but the news conference with Powell might narrow that focus. Eyes will be on the consumer as well with retail sales.

The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.