Weekly Recap: 3/10/24-3/21/24

Macro & Economic Developments: 

• US Economy: As the White House continues to announce tariff plans, inflation data has been positive in the wake of increased market uncertainty. The February CPI report showed a smaller increase than both the prior month (+3.0%) and economist expectations (+2.9%), coming in at +2.8% YoY.  Sequentially, CPI added +0.2%, lower than the previous +0.5% seen in January. Core CPI increased only +0.2% since January and +3.1% YoY, making it the “lowest yearly increase in core CPI since April 2021.” PPI had a similar effect, reporting no change in February. Notable sequential segment changes within the index were gas and eggs, which decreased by -4.7% and rose by +53.6%, respectively. The labor market is also still seemingly healthy, as job vacancies for January came in at 7.7 million and jobless claims for the week ending March 14th were 223,000, lower than the expected 224,000. This comes as multiple corporations and the federal government conduct layoffs. The housing market seems to be opening up, with existing home sales increasing +4.2% in February and the average mortgage rate falling to 6.76%. Lastly, amongst the hard data, the US consumer is still spending, with retail sales for February rising +0.2%. This was, however, lower than the economist's expectation of +0.6%, indicating a more conservative approach due to uncertainty. Unsurprisingly, the University of Michigan Consumer Sentiment Survey and Builder Confidence indicated worries about tariffs and inflation, as the former showed a reading of 57.9, “its lowest level since November 2022.” With Trump recently imposing tariffs on steel and aluminum imports, builders surveyed in the NAHB/Wells Fargo Housing Market Index helped the reading fall to the “lowest level in 7 months” with 39. The FED, as expected, kept rates unchanged in its March FOMC meeting, sticking to its two-cut forecast in 2025 despite policy uncertainty. Unemployment, however, is expected to reach between 4.4 and 4.5% this year.    

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Earnings & Corporate Developments

• Ex-Tech Guidance: Outside of the technology sector, companies continue to acknowledge future macroeconomic uncertainty but seem to be taking opposite ends of the spectrum. Darden Restaurants, which reported underwhelming revenue of $3.16 billion and +0.7% increase in same-store sales, cited that “only consumers making less than $50,000” had decreased their spending at its restaurants. CEO Rick Cardenas noted the recent breakdown in soft data but said that “as long as incomes are going up and outpacing inflation” the consumer will continue to spend. Additionally, Carnival Corp increased its profit guidance for the year but still mentioned “heightened macroeconomic volatility.” Airlines did not shy away from expressing concern, indicating both an unwinding of sector trends and broader macroeconomic volatility as root causes. Delta, for example, cut its quarterly EPS guidance to $0.30-$0.50 after previously expecting $0.70-$1.00. As other companies have, the airline pointed to “the recent reduction in consumer and corporate confidence.” American Airlines also lowered its guidance for the quarter, crediting “softness in the domestic leisure segment” and recent press about a crash involving one of its planes. In Europe, BMW estimated tariffs to cause it to lose “1 billion euros ($1.09 billion) this year.” Another common theme prevalent in recent reports has been a more value-oriented consumer, as General Mills stated that it will focus on “value, pack sizes, and innovation”, Costco indicated that its members want “quality, value and newness”, and Todd Vasos of Dollar General noted that its customers “only have enough money for basic essentials.” American Eagle Outfitters, which reported historical revenue of $5.3 billion and adjusted operating profit of $445 million for 2024, said that it was actively “reducing its reliance on China” and “maintaining redundancy across 15 countries to adapt as needed” to combat tariff exposure. 

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Market Takeaways:

• US Equities:

• Despite recent uncertainty, SPX, DJI and IXIC all finished in the green, indicating potential “buying of the dip.” Both monthly and YTD timeframes remain telling of the volatile performance markets have recently gone through.  

• Interestingly, IWO performed the strongest out of its peers this week (+0.66%), especially since both higher-for-longer rates and inflation from Trump’s tariffs could be severe headwinds for such companies.  

• XLE continued to outperform its peers this week, followed by XLF and XLV. This is a testament to the rotation out of mega-cap tech that has been prevalent since the start of the year. 

• US Macro/Fixed-Income:

• The 2-year yield has fallen below 4.00%, with the 10-year and 30-year yields also falling. As a benchmark for mortgages, as well as being a prediction of future rate policy, further downside could lead to more activity in the housing market. It could also cheapen the dollar, helping multinationals who are bringing in significant revenue from overseas. 

• DXY continues this trend, staying flat for the week but remaining in a monthly and YTD decline. Many companies have cited a strong dollar as a headwind for their earnings, so, if reversed, it could lead to better-than-anticipated growth.

• Both LQD and HYG rose this week, which, contrary to the pessimistic view of recent soft data, could be an indication that sentiment isn’t as bad as the headlines make it seem. 

• Global Macro/Equities: 

• Unsurprisingly, German bonds have fallen in yield, likely due to the increase in spending on defense and infrastructure. This is also related to international equity outperformance relative to the US, as spending could lead to economic growth and better performance for domestic companies.

• EUR/USD and GBP/USD are both skewed in favor of the dollar, as tariffs increase the chances of easing to stimulate economic growth in Europe. A lower interest rate environment in the respective regions would cause weakness in the currency. 

• INDA seems to be on the way to reversing its YTD trend, as previous bearishness towards the region offers an opportunity for investors looking to diversify out of US equities.

• Commodities:  

• Gold, as a safe haven asset, continued to rise, indicating that uncertainty is still prevalent around the outcome of US policies and the reorganization of global trade. This is reducing overall risk tolerance amongst investors. 

• Oil increased this week after falling due to a seemingly calmer geopolitical environment, particularly in Israel and Russia. However, continued skirmishes and negotiations surrounding ceasefires could add to volatility. 

• Bitcoin, a proxy for investors risk tolerance, showed strength. In the context of its monthly and YTD drawdown, it provides markets with some hope that recent volatility is short-lived. The Trump administration’s recent mentioning of a crypto reserve has also helped the asset class. 

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My Thoughts: Despite this week’s performance indicating that optimism is still on the table, I believe the recent soft data will translate to an overall pullback in both consumer spending and business investment. This will, as a result, lead to slower growth for the year. However, buying tactically to take advantage of certain sector pullbacks and rotations could prove profitable, as many of the biggest losers since the beginning of the year (specifically Mag 7) haven’t changed on a fundamental basis. As has been said, both direct and indirect results of tariffs will likely pop up in Q2 of 2025, coupled with the fact that some companies haven’t even factored them into their forecasts. Therefore, trying to find names that are fundamentally sound, with the ability to withstand short-term uncertainty from Washington, are sound choices in the current environment. 

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Portfolio Positioning & Tactical Insights

Portfolio Bias & Market Sentiment

Current Portfolio Bias: Neutral

Market Sentiment Overview: Market sentiment is currently skewing to the bearish end, with pockets of the market remaining hopeful that Trump is simply using tariffs as a negotiating tactic and not a long-term rearranging of global trade.  

Tactical Adjustments & Strategy

Sector & Asset Class Allocation:Increase exposure to residential REITs due to lower US yields, which will increase refinancing activity and provide fuel to a struggling housing market. 

Fixed Income Positioning: Increase allocation to Investment-Grade bonds to manage uncertainty and volatility. Companies with strong fundamentals are likely to still show stability amidst turmoil, providing a fixed yield throughout. 

Stock Style Rotation: Rotate into Growth based on the recent broad market sell-off, particularly in names not expected to be severely impacted by tariffs. This includes software and cybersecurity. Companies that had previously expensive multiples are now cheaper, with the AI thesis remaining generally intact. 

Risks to Monitor & Potential Impact

Macro Risks: The risks to the US economy continue to be both inflation from tariffs and an economic slowdown. With multiple countries announcing retaliatory measures if the US follows through with its threats, large multinationals could suffer overseas, in addition to the US consumer falling victim to both ends of the trade war. 

Sector-Specific Risks: Retail and hardware tech companies are very likely to feel the effects of tariffs. Since many supplies for both sub-sectors are manufactured in China, supply chains would either need to be altered or price hikes will be passed on to consumers. 

Market Volatility Factors: As tariff announcements, adjustments, and threats continue to come out of the White House, investors should expect further volatility. However, this makes staying rooted in fundamentals more and more important. 

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Index Performance:

Factor Performance:

Sector Performance:

US Macro Performance:

Corporate Bonds: 

Global Yields: 

Currency Pairs: 

Global Market Performance

Commodities

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