Week ended March 14, 2025: markets volatile (again)

The sell-off in global equities is getting more painful, as investors continue to shun risk and pile into safe haven assets. What makes this sell-off difficult for me to digest is that it increasingly feels like a proverbial “own goal” which did not have to be. It’s no use rehashing the culprits week after week in this update, since they remain the same. Front and centre last week was again the ever-increasing scope and intensity of on-again, off-again tariffs. Investors are so confused, and markets have performed so poorly, that I am actually beginning to wonder how long Mr Trump will stick with his current economics team? History has shown that this president will not hesitate to pull out the dagger if needed in order to deflect blame and improve his own approval ratings. Perhaps I am too optimistic, but I really hope that the message that investors do not like uncertainty is somehow getting through. In fact, it was amazing to see how market sentiment improved on Friday as the White House stayed quiet (on social media), even with the disappointing consumer confidence survey released earlier that morning.

Aside from the constant distraction of tariff talk, economic data from the US last week came in more or less as expected, suggesting that the world’s largest economy might be slowing but remains in decent shape. Importantly, both retail inflation (CPI, here) and wholesale inflation (PPI, here) data for February came in slightly better than expected (meaning lower than expected). However, with core CPI still running at 3.1% YoY – well above the 2%/annum target – the Fed is almost certain to keep its short-term policy rate on hold at this week’s FOMC meeting. Initial jobless claims on Thursday, garnering more focus these days, were also as expected. The only potential fly-in-the-ointment was the Consumer Confidence Survey released by The Conference Board on Friday morning (here), which showed declining consumer confidence and the highest future inflation expectations since the early 1990s. Perhaps this bit of bad economic news was more than offset by investors’ relief that the US government would avoid another shut-down at the last minute, with Democrats in the Senate set to reluctantly wave through a Republican-sponsored stop-gap budget that will enable the government to operate until the end of its fiscal year (Sept 30 2025).

Outside of the US, the UK economy unexpectedly shrank in January by 0.1%, complicating the mission of the Labour government in a country that is struggling still to return to consistent growth.

MARKETS LAST WEEK

Global financial markets continued on their recent trajectory last week, with US stocks getting clobbered (again) although fortunately volatility settled as the week wore on. Monday was particularly bad, with the VIX gapping out to 29.5 and the S&P 500 down 2.4% on the day. Although stocks ended lower in the US across all indices for the week, things got slightly better from mid-week on, even as investor sentiment was hanging on every piece of news that had the word “tariff” in it. The tit-for-tat tariffs have also halted momentum in European equities, which were lower last week, too. Bond yields also fluctuated throughout the week albeit trading in a relatively narrow range, ending the week more or less unchanged.

As I repeat often to my subscribers, the short end of the yield curve (meaning short term interest rates) are influenced by expectations of Fed policy moves, and the intermediate and long end of the curve is influenced the economic outlook and long-term inflationary expectations. Inflation remains “stuck” above the Fed’s target rate although trending in the right direction (mostly), but there is more to go to extinguish inflationary expectations which are being worsened by tariffs and the threat of mass deportations (latter putting pressure on wages). These factors put upward pressure on yields. As far as economic growth, investors are expecting Trump’s economic policies to slow the growth of the US economy, which has been excellent for many consecutive quarters now. This puts downward pressure on yields. The net result is not much movement in yields for the time being, although I feel this could change at any minute as the tug of war continues. The CME FedWatch Tool is now suggesting three rate reductions (of 25bps) in the Fed Funds rate this year, an indication that investors are expecting a weaker US economy. GDPNow (Atlanta Fed) is projecting that the US economy will contract 2.4% in the 1Q25, which would be the worst quarterly performance since 1Q22. The last FOMC economic projections (released by the FOMC in Dec 2024) had 2025 GDP growth (YoY) at 2.0%, so it will be interesting to see if the Fed also revises down its expected economic growth for 2025 in its updated projections which will be released on Wednesday.

In other markets, gold rose intraday to above $3,000/oz on Friday, the US Dollar was unchanged, oil prices were slightly higher, and Bitcoin was volatile but down 2.7% WoW (using Friday level at 940pm). Fixed income investors are also focusing more on corporate bonds, as credit spreads have not surprisingly started to widen. The correlation among US economic growth, stocks and credit markets is positive, meaning as expectations slow for future economic growth, stocks weaken, and corporate bond spreads widen. Corporate credit, especially more risky high yield bonds and loans, will increasingly come into focus if the Trump administration and the Fed stick to their current policies, which is likely. For the first time in many months, credit spreads gapped out last week, with high yield bonds in particular being hit hard.

The section at the end of this update contains updated tables for the indices and assets tracked by EMC.

MY TRADES LAST WEEK

I continued to add back to my positions in BRK.B and V early last week, with shares of Berkshire in particular continuing to surprise with its resiliency in this market downturn.  This is less a reflection of Berkshire’s earnings (steady, not exceptional), and more a reflection of investor acknowledgement that – yet again – Mr Buffet has an uncanny way of seeing trouble before others.  The Sage of Omaha still has his magic touch, with Exhibit A being the fact that he lightened considerably on the company’s public equity positions (especially Apple) during last year’s run, especially in 4Q24.  In retrospect, this looks to be a brilliant decision at the moment.  I still am surprised that the shares have been so immune to the broader market sell-off, and in fact believe the shares are probably over-bought. Even after re-loading late the week before and early last week, I decided again to write another series of short-dated covered calls on Friday as the shares surged in the second half of the week (520s for Mar 21).  In addition to adding back to BRK.B and V, I dipped into NVDA adding scraps near the bottom on Monday, which looks well-timed, at least at the moment.  Feeling we are far from out of the woods, I also added back some downside protection through SPY puts at 545 expiring the end of July (Weds), which replace the SPY puts at 565 expiring the end of April, which I sold (too soon) a couple of weeks ago.  This leaves my portfolio around 35% “hedged” with SPY puts expiring at the end of May, June and July.  This insurance is not free and eats into my returns, but I cannot help but keep it on given the uncertainty that characterises the current environment.

MARKET TABLES

_________________

**** Follow E-MorningCoffee on Twitter, and please like and comment on my posts right here on my blog. You need to be a subscriber, so please sign up. Thanks for your support. ****