Twilight Zone

Weekly Newsletter: March 10, 2025

“It’s just a jump to the left and a step to the right…” Yes, it feels like the time warp this past week. Reminiscent of the on again off again tariffs to more rate cuts being factored into the market. The markets are spaced out on the sensation(al). This past week saw the trade deficit blow out as companies imported a ton of goods in response to the tariff threats. On top of the tariff chatter, the employment picture had a bit for everyone. While the unemployment rate ticked up to 4.1%, the number of jobs created remained at a respectable level. Manufacturing jobs grew, while the government shrunk a bit (with more to come). Wages remained near their recent 4% level, which may keep spending strong. Investor sentiment is near levels that historically marked a turn higher for stocks. However, in the past, equities have fallen much more than the 5% decline from recent peaks. Yes, last week felt like a month or two and the coming weeks may not provide relief. From the inflation data this week and the Fed meeting the following week to the on/off tariff headlines, the volatility is likely to hang around for a while. “You’re into the time slip and nothing can ever be the same.”

The jobs report on Friday seemed almost anticlimactic after a week of 1% daily moves. It took Fed Chair Powell to calm markets with his comments that the economy is in a good place. Friday market turnaround augers for a better week ahead, but this year has been full of uncertainty. The biggest “non-surprise” surprise was the ballooning trade deficit that the tariffs are supposed to help. Companies imported a huge amount of goods to get ahead of higher prices. That in turn may push economic growth, as measured by gross domestic product (GDP), into negative territory in the first quarter. This is even before the tariffs are or will be put in place. The added wrinkle of more rate cuts in 2025 may be due in part to perceived slowing in the economy. It will be a challenge for the Fed to thread the space between slow economic growth and still high inflation. More like between a rock and a hard place than any maneuvering space.

The persistently lower interest rates that began with the calendar flip took a breather last week. It may be in keeping with the unbalanced theme of this year. As the Fed cut rates, interest rates in the markets rose. Today, as a third rate cut is getting discussed, rates once again rose. Coming into the year, some felt rates could rise as inflation may not be tamed and rates fell. Various interest rate models all point to rates being at or near fair value. Meaning that as long as there is not a shock to the economy, rates should hang around current levels. The broad commodity indices have been trending higher but remain below their early 2022 peak. Translation: inflation may continue to be an issue that the Fed will need to balance with the economy.

In what was an ugly week, the one shining spot was nearly everything not in the US. Domestic stocks fell by 2-4%, while international stocks rose by about as much. The last time international stocks did this well vs. US was in late 2022. The big question is whether this is more like 2022 or 2000, when international stocks beat their US counterparts consistently for 7-9 years. International stocks are much cheaper than US stocks, but for US investors to reap the benefits, the dollar will need to weaken as it did in the early 2000s, falling by roughly 40% from 2002 peaks. It may be the ultimate irony that as companies are encouraged to manufacture in the US, the specter of US exceptionalism could disappear as the dollar weakens.

Inflation data will be front and center as the Fed goes into their quiet period ahead of their meeting the following week. Monthly inflation reported this week, if it comes in much above 0.3%, the financial markets would struggle. Lower than 0.2% could be extremely bullish.

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.