Weekly Newsletter: March 24, 2025
As the sports seasons shift from the madness of March college basketball to the pastoral “summer game” of baseball, so too the markets are embracing a gentler Fed. The chaotic period of rate hikes is long past, and a few cuts have been in the books for a while, but the Fed meeting of this past week seemed to calm markets. The Fed will keep rates unchanged for a bit longer but is comfortable with the economy. Inflation is receding, albeit slowly. Employment and spending remain good enough to calm fears of an impending recession. In Fed Chair Powell’s press conference following the Fed meeting, he pointed to the transitory nature of the tariff’s impact on inflation. The use of the word transitory worried some investors, as it was used to describe the early inflation hike as the economy began recovering from Covid. That transitory inflation remains embedded in the economy five years later. The Fed seemed to be laying the groundwork for further rate cuts later in the year, as they project a modest slowing of economic growth and an uptick in unemployment. Further bolstering their “backstopping” of the economy, they are reducing the amount of money they are pulling out of the economy by slowing down their shrinking of the Fed’s balance sheet. At current levels, the Fed’s balance sheet holds as much in debt securities as it did immediately following Covid, but is still well higher than their 2018-19 levels. If rates indeed decline in the months ahead, it will not necessarily be as a result of a booming economy. An even keel would be a welcome respite from the turbulence of the past few months.
There was some time spent at Powell’s press conference on the dour views of consumers and businesses alike expressed in various surveys. How much of what they are “feeling” shows up in the hard economic data like spending or employment? The adage “It’s a recession when my neighbor loses their job, it’s a depression when I lose my job” is apt even today. The survey data has been rather negative so far this year. The retail sales figures and consumer spending (at a very high level) indicate otherwise. While the consumer may say things are bad, they are not acting in a fashion that would support that concern. The lag between a change in the surveys and a change in the hard data is estimated to be roughly 9-12 months. Using that as a guide, if true, the weakness in retail sales and corporate spending would show up late this year. More survey data as well as personal spending figures are released this week and may provide clues to any shifts between “doing as I say or doing as I do.”
The Fed comments of the past week seemed to support the bond market as interest rates fell yet again. The reduction of the “balance sheet runoff” is seen as keeping the monetary spigots a bit more open, allowing money to flow around the economy. That stance could mean more flows into financial assets, meaning higher markets. It could also hinder the Fed’s fight against inflation, but that verdict can not be made for at least another year or two since there are many moving parts going into the inflation machine. For now, the outlook on rates is favorable and likely trending lower for the remainder of the year.
The equity markets continued their recovery from the early month tantrum. Sentiment readings among investors tend to follow the markets, getting bullish as stocks rise and bearish as they fall. Over the past few weeks, sentiment has been among some of the most bearish going back to the financial crisis. This may have set the stage for the bounce that began on the 14th. Whether the bounce is the beginning of a more significant rally or just a pause in a larger decline is far from certain. As strong as the selling was early in the month, the recent rally saw very lopsided buying with little selling. It will take a few weeks to sort out the ”winning side” that could be helped along with some good economic data and a positive earnings season that kicks off in a few weeks. The first quarter has been notable in that the gains in the bond market nearly exactly offset the declines in the broad stock market. Those market declines were driven in large part by the decline in the big tech names which did not completely filter through to the rest of the market. This meant a diversified portfolio felt little of the bigger swings of the SP500 and technology.
On deck are a variety of Fed speakers that will try to explain their views on monetary policy, economic growth, and inflation. The trade balance report may show how much companies ordered to get ahead of any of the tariffs that may be/get imposed.
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.