Wentz Weekly: Uncertainty Leads to Market Correction

Wentz Weekly Insights
Uncertainty Leads to
First Market Correction Since 2023

Stocks fell again last week as uncertainty on a number of issues continued to put investors in risk-off mode. The S&P 500 declined 2.27% for the week to make it its fourth consecutive weekly decline, despite what was welcoming inflation data that came in cooler than expected. Declines were broad based with the equal weighted S&P 500 performing similar to the cap weighted index. The best performing sectors were defensive, like utilities, which is normally the case in a risk-off environment, while the worst performing was consumer sectors like discretionary and communication services.

The fixed income market saw less volatility, with yields only slightly changed on Treasuries. The 2-year Treasury yield rose 3 basis points to 4.03% while the 10-year yield rose 2 basis points to 4.32%. High yield (junk grade) credit spreads, which is the yield difference between two bonds of the same maturity but different credit quality and is seen as a gauge on the economy’s health, have widened since the market pullback began, but remain relatively tight, suggesting no major concerns on the economy.

The major theme over this drawdown period has been aggressive tariffs by President Trump leading to trade wars with some of the U.S. biggest trading partners along with worries over an economic slowdown that have both weighed severely on sentiment.

In fact, the (preliminary) consumer sentiment index for March was released Friday that showed sentiment fell to the lowest level in 29 months (since Nov 2022). This comes not long after sentiment surged after the election to the highest levels since early 2021 when the economy was recovering from Covid.

It all comes down to uncertainty. The rapid, and aggressive, announcement on tariffs combined with other factors like slowing earnings growth, a slower start to the year for consumer spending, a pickup in inflation, no resolution to the Russia/Ukraine war, the sudden decline in first quarter GDP estimates, and drama in Washington over government spending and a potential government shutdown have created a lot of uncertainty for markets and investors. The U.S. experienced a trade war in 2018, focusing on trade with China, which resulted in a pullback in stocks at that time as well. This time around, Trump has approached tariffs more aggressively and has been much more broad. Businesses and consumers are uncertain, and worried, about the economic impact of these tariffs.

The S&P 500 officially closed in correction territory after Thursday’s trading session. A correction is defined as a decline of 10% or more from recent highs. It is important to remember corrections are a normal part of a market cycle. Corrections are just minor pullbacks for a longer-term investors. It is the first correction for the S&P 500 since October 2023. The Nasdaq had already entered correction last week, down 14% from its December record high.

A correction typically happens once per year and as research firm Yardeni notes, the average correction lasts 115 days and sees an average peak to trough decline of 14%. And as Raymond James notes, the average pullback within any given year is 15. The recent high for stocks was not even a month ago – February 19. Corrections are associated with recessionary periods only about one-third of the time.

What corrections to provide is a good opportunity to review investment portfolios. We are actively monitoring client accounts as usual, but it may also be a good time to review 401k allocations. Feel free to reach out to any advisor here to discuss your 401k or other retirement plan to see if changes are necessary.

The week ended on a positive note Friday with markets recovering a little over 2%. There was a little easing in trade tensions following a “positive and productive” meeting between Canada and the U.S., the passing of a government spending bill that avoided the shutdown deadline Friday night, China providing policy support to its economy, and Visa and Mastercard talking about steady spending trends in the first quarter.

This week we will see more data on the consumer with retail sales Monday morning. The year was off to a slow start, some putting blame on a very cold winter and more severe flu season, so it will be important to see how consume spending develops as we pass the winter months.

The main event this week is the Fed meeting where no change in rates are expected. However, we will see the updated economic projections from all policymakers which will give markets a better idea of how Fed officials see recent developments impacting the economy over the next couple years.

From a tariff perspective, the next big date is April 2, a date the Trump Administration put in place for reciprocal tariff announcements
 
Week in Review:
StStocks saw another big down week, falling for the fourth consecutive week due mostly to tariff headlines. The major U.S. stock indices finished as follows: Russell 2000 -1.51%, S&P 500 -2.27%, Nasdaq -2.43%, Dow -3.07%. Treasury markets were relatively unchanged – the 2-year Treasury rose three basis points to 4.03% while the 10-year yield rose two basis points to 4.32%. Credit spreads widened somewhat, but remain tight and still well under the range they trade in recessionary conditions. The dollar index fell 0.1%, but is down about 6% from its recent highs in January. Gold continues to climb, rising 3.1% for the week and rising to 3,000/oz for the first time ever. Bitcoin fell 3.2%. Oil was relatively unchanged.

Recent Economic Data

• Consumer Price Index: The consumer price index increased 0.2% in February, slowing from the 0.5% increase in January and slightly below the expected 0.3% increase. After a couple months of increases, gas prices pulled back as oil prices fell, but energy services like electricity and utilities saw larger price increases. Food increased 0.2%. Excluding these two volatile categories (food and energy), core prices rose 0.2%, also slowing from January’s 0.4% monthly increase. Vehicle prices have accelerated lately and are up at a 13.8% annualized rate over the past six months. Shelter prices, by far the largest category of the index, saw a 0.3% increase and has continued to cool, but still up 4.2% over the past year. The overall index is up 2.8% over the past year with the core index up 3.1%, both slowing from January. Finally, the index of services prices (excluding shelter) rose 0.4% and is up 3.8% over the past year, still nearly double the Fed’s target.

• Producer Price Index: The producer price index also increased at a slightly slower pace than expected, unchanged in the month and up 3.2% over the past year. Prices for final demand goods increased 0.3%, led by food and offset by lower energy prices. The index for final demand services fell 0.2% led by trade. The core producer price index, which excludes food and energy prices, increased 0.2% in February and up 3.3% over the past year.

• Job Openings and Labor Turnover Survey (JOLTS): The number of job openings on the last day of January was 7.740 million, a drop of a little over 200,000 from December and about 730k lower than where it stood a year ago. The number of job openings is only about half a million below where it was trending prior to the pandemic. The number of people being separated from their jobs has trended downward, but this is due to the number of quits falling to 3.3 million, down slightly from a year ago but down over 1 million from the peak in 2022. The number of layoffs has remained relatively flat.

• Jobless Claims: The number of jobless claims filed the week ended March 8 was 220,000, a small decline from the prior week with the four-week average up slightly to 226,000. The number of continuing claims fell 27k to 1.870 million with the four-week average up 6k to 1.872 million.

• Consumer Sentiment: According to the Consumer Sentiment index, compiled by the University of Michigan, the surge in optimism that was seen after the election has quickly faded with declines seen across all groups of age, income, and regions. The consumer sentiment index was 57.9 for the preliminary March survey. This was a decline of 7.8 from February’s level, about 6 points below expectations, and the weakest level since November 2022. The current conditions index was 63.5, falling to the lowest in six months. The expectations index fell 10 points to 54.2, the weakest since July 2022. Inflation expectations were no better – the one-year inflation expectation was 4.9%, up from 4.3% last month and the highest since November 2022, while the five-year/long-term expectation moved up to 3.9%, the highest since 1993.

Company News

• Alphabet: Reuters reported the Justice Department filed an updated proposed final judgement where it dropped its previous request that a judge should order Google to divest its investments in AI-related companies, but instead kept its request for Google to sell its Chrome browser.

• Rocket Companies: Mortgage, real estate, and personal finance company Rocket Companies said it has agreed to acquire real estate brokerage firm Redfin in an all-stock transaction that would value Redfin at $1.75 billion, or $12.50 per share. The price reflects a 115% premium to where shares traded prior to any takeover speculation last Friday March 7. Rocket says it expects the combined company to achieve more than $200 million in synergies by 2027. Rocket shareholders will own 95% of the combined company while Redfin shareholders will own 5%.

• Delta/United Airlines: Airline stocks were hit hard last week after several airlines cut their guidance. Delta was first to update its outlook with disappointing guidance for the first quarter. The company said it saw a strong January, but the lower forecast was due to reduced consumer and business confidence from the macroeconomic backdrop. American Airlines later updated its forecast as well for lower earnings and revenue growth due to uncertainty.

• Southwest Airlines: Southwest said it will start charging a fee for checked bags, a major shift from its “bags fly free” trademark and policy in a new strategy in effort to boost revenue, but angering many of its loyal customers. It will also be adding a lower level fare that is similar to rivals’ basic economy fare, that come with many restrictions.  

• Meta: Facebook will begin testing its new Community Notes fact checking tool this week as part of its shift to letting users police content on its platforms themselves, replacing the company’s own fact checkers, according to the Wall Street Journal. Platform users who are at least 18, have had the account at least six months, and are in good standing can sign up to be a contributor. The way it is planned to work is they add notes to a post on an internal system and if enough posts get similar internal notes, the fact check will be shown publicly.

• Apple: Bloomberg reported that Apple is preparing for the most substantial revamp in the company’s history for its operating system. The revamp is due later this year and will fundamentally change the look of the operating system to make its software platforms more consistent including updating style of icons, menus, apps, windows, and system buttons, and is based on the Vision Pro’s software, the report notes. The goal is to simplify how users navigate and control their devices and is expected to come as part of its iOS 19.

Other News:

• Tariffs:
  • On Tuesday Trump ordered tariffs on steel and aluminum imports to increase to 50% in direct response to Ontario’s (Canada) plan to impose a 25% surcharge on electricity exports to the U.S. The premier of Ontario, Doug Ford, quickly rolled back those plans and agreed to meet with U.S. officials, then Trump reversed his decision on doubling steel and aluminum tariffs.
  • In response to the U.S. tariff on steel and aluminum imports, Canada said it will put a 25% tariff on $21 billion of U.S. goods while the European Union said it would impose a tariff of 25% on $26 billion of U.S. goods to match the economic scope of the U.S. tariffs. 
  • Trump has threatened tariffs of 200% on French wine, champagne, and other alcohol products from the European Union. This is in response to the EU’s plan to place tariffs on American whiskey exports (included in the items above), which was a direct response to Trump’s tariffs on steel and aluminum. Asked if he would repeal the steel and aluminum tariffs or pull back plans for reciprocal tariffs set to go in place April 2, Trump said “No… we’ve been ripped off for years, and we’re not going to be ripped off anymore.”
  • Both President Trump and Treasury Secretary Scott bessent defended the tariffs, with Trump saying there will be “little disruption” but not for very long while Bessent said the administration is focused on long term gains instead of shorter term volatility.
  • April 2 is now the next important date for trade – that is when Trump’s plan for reciprocal and sector-specific tariffs are expected to take place, based on prior comments.

• Government Spending Bill: After Senate Democrats initially threatened to block the Republicans stopgap spending bill, preferring to push for a month long stopgap bill, both sides agreed to new legislation that would keep the government funded through the end of the fiscal year through September shortly before Friday’s midnight deadline. The bill keeps government funding at levels set during the Biden Administration with only very small changes in defense and nondefense spending.

• Ukraine/Russia: The U.S. and Ukraine have agreed to a 30-day ceasefire for the Ukraine/Russia war, with Putin later saying he is in favor of it but there are “nuances,” adding that it needs more negotiating and must lead to “enduring peace.” Putin initially offered support for the ceasefire, but then rejected the deal instead calling for more discussion on a permanent end to the war. He said any pause in fighting right now would be in Ukraine’s favor since Russia has made significant gains recently on the battlefield.

WFG News

Tax Documents

Please see this release to understand the timing on when to expect tax documents.