Beware the ides of March

The financial headlines today are all about the S&P 500 having another down day yesterday and, as a result, entering correction territory, which is defined as a 10% fall from the latest peak. The unshakeably bullish sentiment at the start of the year is now entering fear territory. As an illustration of the change in sentiment, the S&P Global Investment Manager Index survey indicated a “sharp – and gathering decline” in risk appetite since early February, marking one of the most risk-averse periods for US equity investors in five years. The sharp decline in US equities started after a weaker flash PMI survey at the end of February, starting the whole stagflation debate.

What was most noteworthy this week was that the data from both the CPI and the PPI came in softer than expected, but that did nothing to help US stocks. One would have naturally expected weaker inflation data to have boosted equity markets in the expectation that the Fed would have more room to ease monetary policy. A fall in airline prices, apparently from weaker demand, and new car prices fell, both further possible signs of a fading consumer, helped lower the headline rate.

Two-year treasury yields, which have fallen substantially since the start of the year, hardly moved this week, indicating that this weaker inflation data has not changed expectations for when the first Fed cut might occur. Which I think is now expected mid-summer. Part of the reason for the lack of enthusiasm for the numbers is that one swallow does not make a summer; the fear is that the upward trend will re-ignite, and the core rate remains above 3%, quite far from the Fed’s 2% target. So, you have a weakening consumer who has maxed out his credit card, and as a result, growth is weakening, and prices are falling, but not fast enough.

So where’s the good news to suggest that, at least for the short term, the pain of falling stocks might abate? Realised volatility has jumped this month, graphically illustrating the increase in fear from market participants, which is good news. Interestingly, as a result of the recent sharp selloff in the Mag 7, the valuation premium over the rest of the S&P 500 hit its lowest level since 2017. Still not cheap, but it’s cheaper, Tesla has halved in value. Hedge funds will likely have taken a battering, and as a result, they will have been reducing exposure, which should help. The Vix index, having peaked earlier in the week at 30, traditionally, with a few exceptions, is a sign that at least in the short term, pain thresholds have been met, is now down on the week.

Whether we are in for a sustained recovery or an oversold bounce will depend on the upcoming data. The FOMC, the Bank of England (BoE), and the Bank of Japan will meet next week. All will likely keep rates on hold, but Powell’s post-meeting comments will be eagerly awaited. He tried to calm nerves a week or so ago, which led to a short-term rally that faded quickly. Better Asian markets overnight are at least helping European equities open positively this morning.

Finally, as I have taken up too much of your time, the latest UK GDP data will not make for a pretty reading for Ms Reeves this morning.