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In an interview on Fox this past weekend, Donald Trump was asked if he was expecting a recession. He replied: “I hate to predict things like that. There is a period of transition because what we’re doing is very big.” Alongside his comments regarding “a period of transition,” Treasury Secretary Scott Bessent states, “We’re seeing the hangover from the excess spending in the Biden 4 years. In 6 to 12 months, it becomes Trump’s economy.” Kevin Hassett, Director of the National Economic Council, said he expects a negative first quarter QDP. However, Hassett thinks the economy will “take off” in the second quarter after tax cuts.
Based on these comments and others from the administration, the markets are considering that an economic transition, aka a period of weak economic growth or a recession, is becoming increasingly likely. Trump’s use of the word transition refers to the period where reduced fiscal spending, including layoffs, negatively impact the economy. However, before, the benefits of fewer regulations and tax cuts will positively affect the economy. Consequently, as shown below, the December Fed Funds futures contract has risen 50bps since mid-February, thus pricing in two more 25bps rate cuts by year end.
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Market Trading Update
Yesterday, we noted that markets were holding support at the 200-DMA and had reached oversold levels. However, as we stated:
“Yes, the market is down roughly 7% from the peak, but we have seen these corrections repeatedly in the past. That does NOT mean a more extensive corrective process is not potentially in process. It only implies that markets are likely in a position for a technical rally to reverse the more extreme oversold conditions.”
Yesterday, support gave way at the 200-DMA, triggering significant market selling. While the S&P 500 fell 2.7% yesterday, it is worth noting that the market is still well within the context of an annual corrective event. As shown below, the market is now pushing well into 3 standard deviations below the 50-DMA, and relative strength is below 30.
The last time the market was this oversold and 3 standard deviations below the mean was in August of last year during the 10% correction as the “Yen Carry Trade” erupted across markets.
While yesterday’s sell-off certainly brought attention to the markets as the media scrambled to find reasons behind the decline, the reality was that it was mainly a technically driven event, as algorithms flipped the sell switch. With the establishes likely complete, we should see some stabilization over the next few days. Notabily, we are not in a “buy the dip” event, but a “sell the rally” mode for now. Use rallies to rebalance risk and positioning until the market establishes a firm bottom and builds off of it.
Economic Uncertainty Surges
The Goldman Sachs Economic Policy Uncertainty Index is now at its second-highest level in 30 years. Similar levels as we have today were only witnessed in the 2020 COVID Crisis, the Great Financial Crisis, and the 2001 dot-com bust recession. As we led today’s commentary, this “period of transition” is roiling economic confidence and markets. We suspect that weakening confidence will further weigh on the economy. The question reporters should ask Donald Trump is how long should we expect this economic transition to last.
Sectors Shift Left
With the broad market sell-off, the sectors are shifting left in the SimpleVisor graph below. This signifies that their absolute technical scores are deteriorating. However, while many sectors are declining, they are outperforming the S&P 500. Thus, most sectors are in the upper half of the graph. As shown, transportation, discretionary, and technology are the only sectors oversold versus the S&P 500. Given the significant contribution that technology and discretionary shares make, the performance variation versus the market is not surprising.
Factors like foreign markets, value, and low beta are leading the way on a relative basis. Similarly, like the sector analysis, high beta, disruptive technology, and small, mid, and large cap growth stocks are the most oversold.
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