Investors In Adjustment Mode

Markets reeled last week from perceived "hot" inflation data and continued stress over tariffs.

Since the peak of Mag 7 stocks in December of last year, the euphoric high among equity investors has faded, and that's probably a good thing. Despite calls in financial media for a recession, we're not seeing the typical signs. There are been multiple cases where the "Euphoriameter" pulled back that did not result in recession. In addition, jobless claims tend to spike when we are near recession. So far, both Initial Jobless Claims and Continuing Claims are well below pre-recession levels. Credit spreads, while elevated from near all-time lows, have not even reached the level seen last August when markets pulled back 8%. And, finally, the smoothed recession probability model published by the St. Louis Federal Reserve also shows we are not at typical pre-recession levels.

While recession talk in financial media is the latest rage, tariffs and stagflation seem to be the additional talking points.

Last week's PCE Price Index (Personal Consumption Expenditures) report showed a slight increase in inflation on a month-over-month basis. This was termed as a "hot" report by the media. However, the year-over-year expectation for PCE for February was 2.5%. The report came in at 2.5%. Do you know what last month's measure was - that's right, 2.5%. What's so "hot" about that? The talk of stagflation is missing just one important ingredient - high unemployment. As we mentioned previously, jobless claims are not elevated and unemployment is at 4.1%, also not elevated. Finally, tariffs have been blown out of proportion in our view. The latest survey of CFOs shows that the vast majority have made no significant business changes in light of higher tariffs. The current pullback in equities could continue until there is more clarity on tariffs and inflation.

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