April showers they say, it can also bring sunshine

Wall Street finished the week in a bad mood. A combination of a weak consumer report and the core Personal Consumption Expenditures price index suggested that higher prices continue to remain sticky, did for markets on Friday afternoon. Wall Street has finished lower for seven of the past nine weeks. The Nasdaq index has given up all of the past 6 months’ gains and much of last year’s. The whisper of stagflation haunting the US economy a few weeks ago has become a full-blown discussion.

What can markets expect this week to allay some of the fears or possibly reinforce them? Tarriff concerns are blamed for this combination of weaker consumer sentiment and concerns that prices may remain elevated. On Wednesday, the US will outline the tariffs it will impose on trading partners in addition to those already announced, which may offer some clarity. The monthly Purchasing Manager Surveys will give further insights into the impact these tariffs are having on economic sentiment.  March Flash PMI reports showed output growth ticking higher across the major developed economies; however, growth was uneven and has remained modest this year, according to S&P Global. Furthermore, business sentiment has sunk to its lowest point since late 2022. Aside from the PMI reports at the end of the week, the focus will turn to the non-farm payrolls, like much of the data that came out last month’s February report disappointed, with just 150,000 jobs created.

What surprised me this morning was the Citi US economic surprise index, which measures economic outcomes against expectations and has been on a downward trend for much of the year but ticked higher in March. The global index has likewise been tracking higher in recent weeks. The Vix fear gauge spiked on Friday, as one would expect with such a dramatic move in US markets, but the index is lower than it was in early March and around its historic average. Another interesting feature of this correction is that the NAAIM Exposure Index asks member firms who are active money managers each Wednesday to provide a number which represents their overall equity exposure at the market close. They have been selling. The current index level is back at lows, as seen last January and late summer, indicating a significant reduction in equity exposure. In contrast, retail investors, who you would traditionally expect to run for the door at these times, have apparently been buying the dip.

In conclusion, as we begin the second quarter, am I seeing any indications that a rally could be on the cards for US equities? Sentiment has become quite negative; the CNN sentiment index is back in fear territory. We have the first quarter earnings season coming up, which will undoubtedly influence sentiment. European markets are set for a weak opening following Friday’s US close, but do I see the possibility of a bounce back in US stocks in the coming weeks? What is it that Buffet says? Oh yes, when others get fearful,…… You know the rest.