Certainly Uncertain

By Paul Nolte

Weekly Newsletter: March 31, 2025

The dialog between Lucy and Charlie Brown describing his various fears ends with “Maybe you have pantophobia, do you think you have pantophobia? What’s that? The fear of everything, THAT’S IT!!”. The consumer confidence index released by the University of Michigan put Wall Street on notice that consumers seem to be afraid of everything, which led to the market swoon on Friday. The various bits of sentiment readings are indeed worrying, as respondents, from consumers to investors, are worried about the economy, financial markets, and the world in general. Those sentiment readings, however, are in opposition to what the consumer is doing. Whether retail sales, overall spending (figures released last Friday were decent), or getting a table at a favorite restaurant, the consumer is feeling pretty good judging by their actions. Employment remains good, and it is a key driver for spending. Weekly jobless claims and continuing claims remain within a historically “good” band. This Friday, the non-farm payroll numbers get released, along with wage growth. The estimate of 140k in new jobs should keep the unemployment rate around 4.1%, which remains historically low. Of course, a steady diet of Fed speakers will be chatting this week, culminating with Chair Powell on Friday. Better to be Alfred E. Neuman than Charlie Brown!

The markets were set to put in back-to-back winning weeks for the first time since the end of January when the consumer confidence number hit the wires. The overall data of the week was decent, but many of the reports are second or third level in importance. The big ones will be hitting this week, from factory orders to service data and finishing off with unemployment. When looking at the various bits of data that seem to be providing a sense of economic health, jobs and retail sales continue to be doing just fine. While that can easily change, for now, both seem to reflect an economy growing around 2%. Without jobs, nobody is spending. The weekly new and continuing claims figures have been in line with historically good job markets over the past two years. Deviations from those historical norms could point to issues like recessions in 2002 and 2008, when claims rose well above their normal trends a year or two in advance. Without employment, spending and retail sales would not be doing well. The latest retail sales figures show consumer spending above the rate of inflation, meaning they are taking home more, not just “covering” inflation. The data over the next few months could change from the recent trends; however, until then, it has been foolish to count out the consumer too early.

The bond market remains on rate-cutting alert, figuring that the Fed will have to cut rates at least twice this year to prevent the economy from dipping into a recession. Even high yield spreads have begun to widen out, an indication of concerns in the riskiest portion of the bond market. Discussions around a government shutdown, additional bond issuance due to still high spending, and higher rates have not worried bond investors. Even a few ticks higher in overall commodity prices do not concern treasury buyers. The betting among investors is that a recession is on the immediate horizon (potentially hurting equities), and the Fed will have to continue cutting rates (helping treasuries). Maybe the economy does another dip but does not scrape the recession levels, what then? Bond yields could back up, especially if inflation remains sticky around 2.75-3%.

It was one of the worst quarters since the 2022 decline. Thankfully, the first quarter ends today! For all the handwringing, though, there were some bright spots. Technology, consumer cyclical, and services (which have tech companies heavily weighted) were among the worst during the quarter, while healthcare, finance, energy, utilities, and telecom all finished higher in the quarter. The fact that these four sectors make up less than 20% of the overall index, while technology and related make up over 30%, it is not hard to see why the SP500 finished lower, while many stocks did not feel the same pain. International, emerging markets and commodity prices did well during the quarter, meaning the less technology exposure in a portfolio, the better the overall performance. The equal-weighted SP500 ETF finished roughly unchanged, while the SP500 fell by more than 6%. Technology stocks have carried the big indices higher over the past two years, and their reversals could also pull them lower. Outside of the big tech names, there remain plenty of opportunities for investors.

Friday will be THE day to tune into markets. The unemployment report hits the wires along with Chair Powell among the various Fed speakers. It could be an interesting end of the week.

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.

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