The stock market in the US entered a sharp selloff during late February and early March. Three catalysts contributed to it: 1. The US economy is transitioning from being government-driven to private sector-driven. 2. Tariffs and geopolitical instability. 3. Technical indicators confirming investors’ uncertainty. Although stock investors show uncertainty, the good news is that bond investors seem to have a better understanding of the economic cycle. In other words, the current stock selloff shows a positive correlation between the stock market and the economic cycle. When inflation and growth slow down simultaneously, it is called Phase IV in the economic cycle, and the stock market falls.
My short-term view has not changed. Financial markets are still facing short-term volatility. However, the mid-and long-term views continue to be positive for the US market.
Point 1. I expect GDP to decelerate, but I don’t expect the economy to go into recession—at least not with the current data. The deceleration should come from government spending and consumption. GDP = Consumption + Investment + Gov. spending + (Exports – Imports). We’ll see lower gov. expenditure during the next few years. However, there will be more positives to counter it: less red tape, more private sector investments from foreign and domestic companies, and energy independence, which should lower the price of energy across the board. These two combined (lower deficit/lower printing of money and lower energy cost are the most disinflationary measures we can have. By the way, to put things into perspective, Gov. spending is about 6% of GDP. Consumption is about 70% of GDP.
Yields moving down could be a sign of no inflation pressure and favorable for stocks. Consumer confidence is highly associated with economic growth or lack of it. This is probably why the 10-year and two-year yields are breaking down in anticipation of lower inflation, lower GDP growth, and a Fed rate cut sooner or later. If it were to happen, it would be positive for stocks. We expect inflation to decelerate from January to February and March. Furthermore, inflation may continue to slow through Q2 2025. Lower consumption equals lower GDP. When economic growth and inflation decelerate together, stock investors with no understanding of the economic cycle panic because the probability of an economic recession grows. This is where we are now. In contrast, when I ask if they expect an economic recession during my conversations with other professional asset managers, the answer is always no.
The expectation of a Fed cut and falling yields fuel gold, silver, platinum, and gold miners. Low interest rates are the perfect environment for these four commodities. In addition, volatility broke higher and remains above 20. The stock market does not like volatility between 20 and 30; it becomes challenging to trade, and investors panic. This is why I remain cautious in the short term but feel more confident about the mid- to long-term.
In my studies of the financial markets, I found that economic recessions always trigger bear markets. I see volatility, but I don’t see an economic recession on the radar—at least, not yet. I see an economic slowdown, which is not the same, while transitioning from a government-driven to a private sector-driven economy.
Tax cuts, deregulation, 100% business equipment, machinery and factories write-offs retroactive to January 2025, and “drill baby drill” may significantly impact the US economy. The following names are some of the private sector companies committed to making substantial investments in the US supporting the economic policy of the Trump administration:
Taiwan Semiconductor Manufacturing Company (TSMC) $100B
Intel (INTC) $7.86B
Siemens: $285M
Toyota: $12.6B
Adani Group: $10B
Blackstone: $2.3B
Nordic Capital: $3B
SoftBank Group: $100B
SoftBank + Stargate AI (JV of Open AI, ORCL + Investment Firm MGX): $500B
Apple (AAPL): $500B
Eli Lilly (LLY): $27B
The above investments total about $1.2T. In the free market world, capital is invested where it feels secure and can make a decent return on investment.
Point 2. Tariffs and Geopolitical Instability: Many investors and professionals I talk to outside the US seem unfamiliar with the current status of tariffs between the US and other countries. At the expense of the taxpayer (me), the US pays for the protection of many countries and to preserve the Western world as we know it (NATO). Nevertheless, most countries do not pay or pay minimal import tariffs to access the largest consumer market in the world, the US. However, US products pay higher import tariffs even when accessing the consumer markets of countries under US protection. Tariffs are just negotiating tools. The administration has repeatedly mentioned its determination to level the trade field ideally to zero tariffs. In other words, do not charge me, and I will not charge you. Have you ever thought tariffs might go down after the initial negotiating period instead of up? Certainly not for CNN.
Stock investors show great concern, which is reflected in market swings over tariffs. Their concern is that tariffs might be inflationary. Again, yields are breaking down, not up. Bond investors are not concerned about inflation caused by higher tariffs. The opposite is true. Furthermore, the ECB just cut rates to protect their stalling economy. And most probably, the Fed bias will change from hawkish to dovish while the economy transitions through Phase IV in the economic cycle. Decelerating inflation plus decelerating growth allows for a dovish monetary policy: The Fed cutting interest rates. Add now the new economic plan described in Point 1 above. Again, this is why I remain cautious in the short term but feel very optimistic about the mid- to long-term.
The chart below shows the 10-year yield (solid line) falling since early 2025. The red dotted line shows the 2-year treasury yield, which has also fallen sharply since February.
Point 3. Technical indicators confirming investors’ uncertainty: Since February 19, the S&P 500 Index has dropped about 6.2% to Friday’s closing. The Nasdaq 100 has fallen about 9%, and the Small Cap Russell 2000 Index has dropped about 14.6% since November 29, 2024.
On Friday, the S&P 500 bounced up from the 200-day SMA at 5733 after piercing down to 5666.2 and closing at 5770.20. On July 16, 2024, the index closed at 5667.20. It was important for the index to remain above the 5667 area to have a chance at a short-term bounce. The index recovered and closed above the 200-day SMA on increasing volume, and it is oversold. Therefore, we may see an oversold bounce taking it to the first resistance area at 5900. However, for the bulls to regain control of the market and recover the uptrend, money has to flow out of the defensive sectors of the economy and into the more growth-oriented sectors. Without this condition, the short-term bounce will not be sustainable, and if the S&P 500 retests and closes below the 5660 area, the correction could stretch down to 5250/5200.
The daily chart below shows the S&P 500 Index bouncing from the 200-day SMA on increasing volume (blue arrow) on Friday. The indicators below the chart are the volatility index ($VIX) at 23.37 above the red dashed line and the Accumulation/Distribution index, which shows a slight upward curve trying to regain the uptrend.
The Equity Put/Call Ratio, a Sentiment Indicator published by the CBOE, indicates that the S&P 500 has more room to drop. Thus, the importance of a sustainable short-term bounce to the 5900 area. Market Sentiment is the investors’ attitude towards a company, industry, sector, or index. Rising prices measured by Call Options Volume reveal bullish market sentiment, while falling prices measured by Put Options Volume reveal bearish market sentiment.
The stock market has been in turmoil for the last couple of weeks, and there are indications that the sell-off may continue. To name a few, Mid-Cap, Small-Cap, Transports, and the US Dollar are in a bear market mood. Volatility remains high. On a positive note, yields are on short-term downtrends, inflation is slowing down, and the S&P 500 is oversold. If Washington understands that the US economy may enter a short-term Phase IV cycle, they should act swiftly to approve Trump’s economic plan to speed up the transition from a government-driven to a private sector-driven economy as soon as possible and abort a recession or the probability of one.
The following are essential economic releases that may determine the next leg of the stock market:
- Consumer Price Index (CPI-Inflation) on Wednesday, March 12th.
- Producer Price Index (PPI-Inflation) on Thursday, March 13th.
- Federal Open Market Committee (FOMC, the Fed) Meeting on Tuesday, March 18th through Wednesday 19th. Monetary Policy Statement (Interest Rates announcement at 2:00 pm ET).
Please be aware that my conclusions are always based on the results of our quantitative analysis. Although this article is not the exemption, part of my conclusion here is based on my interpretation of current events, which you may disagree with.
With best wishes,
