Markets in Correction Mode Amid Uncertainty

In the last week of trading, markets continued to roil as fatigue from weeks of tariff-related headlines has set in. This heightened level of uncertainty related to trade policy from Washington has driven investors away from a ‘risk-on’ attitude and now towards more defensive positioning. In the past week, we saw each of the three major averages decline more than 2.3%, with the most concentrated selling continuing to occur with the Nasdaq Composite index, which declined 3.45% on the week. This was the second week in a row in which the Nasdaq Composite lost 3.4% or more of its value. The current market unwind has been sharp in nature as the S&P 500 index has peak to trough, shed 8.5% in just over two weeks’ time. While a 10% correction in the S&P 500 index is a fairly common occurrence, happening on average about once every other year over the past century, this decline is certainly noteworthy due to the reasons for the decline. The combination of investors losing faith in the future earnings growth rate related to A.I. in the coming years and the extreme headline fatigue we are currently experiencing has proven to be a tough headwind for U.S. stocks. Should the current market decline worsen, and we see the averages continue to come under heavy selling pressure, we could risk this pullback becoming more than a typical market correction. However, for now, despite the steep nature of the selling, this seemingly is just a typical market correction of around 10.0%. Even though markets endured strong selling over the past week, when analyzing the technicals, there were a handful of encouraging signs for the weeks to come. For the first time since October ’23, the S&P 500 traded down and tested its 200-Day moving average. Twice in the past week the S&P traded below this level but on each occasion was able to close above it. Since the index did not close below the 200-Day moving average, this is a positive sign as this was a successful test of this support level. Additionally, there is another key support level for the S&P 500 around 5,675, a level that the index found support at previously in October of last year. This is the level where the S&P found support intra-day on Friday before stocks rallied to close the day. Since each of these key support levels have held for now, this is a positive sign that we could be nearing the end in this bout of selling. With that said, as we have mentioned in previous weeks, until the markets are given reprieve from the unabated tariff headline risk, we expect the $VIX and overall volatility to remain heightened.

Key Events to Watch this Week

February CPI & PPI reports
March Consumer Sentiment (Prelim)
Earnings Reports (ORCL, ADBE)
Headline Risk (Tariffs)

After last week’s February labor report signaled that our economy may be a bit weaker in its current state than analysts had predicted, this development paired with persistent and stubborn inflation that has refused to fall to 2.0% or lower, has now invited in talks of potential ‘Stagflation’ on the horizon. This has only been stoked by recent headlines dominated by fresh tariffs and the anticipated subsequent spike in inflation. Due to this, there is now an even greater level of scrutiny that is going to be placed on macro reports measuring the strength of the economy and current inflation rates. This week, we will get two fresh inflation prints as February’s CPI & PPI reports will be published on Wednesday and Thursday respectively. Any progress shown by these inflation gauges would be greatly welcomed by the markets. Also, later on in the week, on Friday morning, the preliminary read on March Consumer Sentiment will be released. This report is surely going to draw some attention after the February read posted a deep downside surprise, indicating that the consumer confidence level was beginning to wobble. As Q4 reporting season is now mostly over and done with, we can look back and gather that it was a strong earnings season with 76% of S&P 500 companies reporting EPS beats. There are two earnings reports of note this week that our team will be watching. On Monday, following the market close, Oracle Corp. will post their Q4 results. Additionally, on Wednesday, Adobe Inc. will report their latest earnings results after the closing bell. The final market catalyst that our team is watching out for in the week to come is one that has been a recent theme, market moving headlines. Since late January when we had a change in Presidential Administration, new policy has been rolled out at a near break-neck pace. This includes the seemingly daily updates to our country’s trade policy. We point this out not to make a political judgement about the merit of new policies in one way or another, but only because of the fact that in recent weeks, these announcements have been a major driver in the market’s action. In the long term we feel strongly that many of the current headlines will prove to be just ‘noise’ but in the meantime, understanding that they are having a significant effect on markets. We feel that it is important to approach any trading in the near term with this in mind.

Thank you for reading this week’s edition of the Weekly Market Periscope Newsletter, I hope you enjoyed it. Please lookout out for the next edition of the newsletter as we will give you a preview of the upcoming week’s important market events.

Thanks,