The Setup & Where to Focus

March came in like a lion for the stock market. The S&P 500 lost 3.1% during the first week of Q1’s final month, but there were plenty of pockets of green across the global equity universe. 

• Dragging US large caps down were, once again, the Magnificent Seven stocks. Losses were steep in shares of NVIDIA (NVDA) and Tesla (TSLA), each down about 10%, while Amazon (AMZN) and Meta (META) both gave back more than 6%. Alphabet (GOOGL) was up 2% as value-buyer stepped in (the stock trades with a P/E under 20), while Apple (AAPL) and Microsoft (MSFT) outperformed, losing 1% each. 

There was red in the once-loved Financials sector, too. 

• Lower interest rates and ongoing macro uncertainty weighed on the area that had such high hopes for a rebound in Wall Street dealmaking and IPOs. 

• Both of those money-making spaces remain cold as we spring forward. 

Steam was also let out of the high-momentum value-consumer theme: Walmart (WMT) lost 7% and Costco (COST) dropped 8%. The latter suffered its worst 1-day drop in precisely a year in yet another leg lower in the momentum factor. 

It wasn’t all bad despite the S&P 500’s worst week since September. 

• Health Care (XLV) was up, an area we have highlighted as featuring relative strength this year, and homebuilders (ITB) surprisingly caught a bid. 

Major strength was seen outside of US borders. 

• The Vanguard FTSE All-World ex-US ETF (VEU) closed last week at an all-time high on a total return basis. 

• We added to foreign stocks early last year, and while that was a bit premature, VEU has now outperformed the average US stock over the past 12 months (as measured by the Russell 1000 Equal Weight ETF (EQAL)); VEU and the Nasdaq 100 ETF (QQQ) have about the same return on the 1-year chart. 

• Foreign developed markets had their best week relative to the S&P 500 in more than two decades.

Europe was on fire—the SPDR Euro Stoxx 50 ETF (FEZ) soared 6%, led by intense gains among German defense stocks. President Trump has made it clear that other countries aside from the US must increase their defense spending and put on their big-boy pants to armor themselves to a larger extent. 

Gold and bitcoin were up amid major weakness in the US Dollar Index (DXY). 

• The greenback suffered its third-worst weekly decline since the Great Financial Crisis, losing 3.6%. 

• As the story goes, with increased EU defense spending, the bloc’s economic growth will jump, more European bonds will be issued, and yields will rise. Higher interest rates across that region may attract capital, just as the US undergoes modest austerity. That rate differential is beneficial for the euro, and dollar bearish. 

• Moreover, it comes just after sentiment was extremely downbeat and positioning was sharply underweight Euro Area stocks. 

• It has been the perfect recipe for European equity alpha: FEZ has outperformed US equities by 24 percentage points in the last 42 trading days—a record.

Macro volatility catalysts have come in fast and furious, mainly to the detriment of the most US-centered investment plays. 

• The Russell 2000 ETF (IWM) is down each week of Trump 2.0 and is now negative from where it traded four years ago. 

• US momentum stocks got hammered to begin March—the iShares Momentum ETF (MTUM) shed 6.5% for its worst week relative to the global stock market in its 13-year history. 

• Energy shares were also taken to the woodshed—the Energy sector ETF (XLE) fell 4% as WTI settled at its lowest weekly mark since November 2021.

President Trump and Treasury Secretary Bessent are getting their way with lower oil prices and softer interest rates. 

• The yield on the 10-year Treasury note fell to 4.10% last Tuesday, falling some 70 basis points from its January high. 

• The bond bears came out of hibernation over the balance of the week, though, and the 10-year rate rose four straight sessions, closing at 4.32% last Friday. 

• Price action across asset classes has been wild ever since January. 

This week, key economic data, including CPI, PPI, and UMich, hit the tape, the Fed is in its blackout window ahead of its March 19 interest rate decision, and we are between earnings seasons. 

• So, ears will be tuned into what seem to be daily updates from President Trump on tariff policy. 

• Additionally, the March 14 government shutdown date looms, but the odds of a major riff between the Republicans and Democrats to shutter DC appear lower today. 

• We will also be on the lookout for developments in Europe and any updates on a deal between Russia and Ukraine. 

• The POTUS will meet with executives from a slew of US tech companies and semiconductors makers on Monday, so the action could get going early. 

• Finally, we’ll see if 25% tariffs on steel and aluminum from Europe indeed go into effect on Wednesday.

The big economic story last week was the February jobs report. 

• Despite it being hotly anticipated, there were no shockers in the first full payrolls survey of Trump’s second term. 

• The headline employment add was close to estimates (actually above the whisper number) and the jobless rate rose to 4.139% from 4.011%, but it remained in its range going back to last summer. 

• Though the establishment survey tallied a decent gain, the household survey, used to figure the unemployment rate, had its worst contraction since December 2023. 

• The U-6 “underemployment rate” shot up to 8.0% from 7.5%, its biggest sequential increase since October 2021. 

• While DOGE employment cuts were really seen in the February NFP, private payrolls accounted for a chunk of the labor market expansion last month, something Trump’s economic team enjoyed seeing.

The jobs market remains “good, not great” considering a rangebound unemployment rate, a labor market that is averaging 191,000 payroll additions monthly, and a lower Sahm Rule indicator—now less than half of what it was last August. 

• Elsewhere, the ADP Employment report for February showed a small 70,000 increase in workers, and last week’s Initial Claims print was tame at just 221,000. 

• Challenger Gray jobs cuts spiked in February, but it’s still not all that high when zooming out.

Weekly Calendar Look Ahead

Amid a stable labor market with few hiring and firings, the focus turns to inflation this week. Monday morning, we’ll get the NY Fed Consumer Inflation Expectations survey. Recall last time that it contradicted what the UMich report found—the former revealed modest inflation fears while the latter featured a 3-year high in long-run inflation expectations. We predict Treasurys to fall in price for a fifth straight session if households’ inflation feelings shoot up in the report. Treasury bill auctions are the only other macro events on the 10th.

On Tuesday, more inflation clues come about via the February NFIB Small Business Optimism Index. While other sentiment updates have reversed course lately, the Republican-leaning index has remained high since November. We will look for updates on small business owners’ uncertainty and capex plans within the report. Elsewhere on Tuesday, the Johnson Redbook retail sales gauge has been sanguine despite rising fears of a broad consumer slowdown—we expect another solid YoY increase north of 6%, but see it eventually cooling to 5%. Later that morning, the January JOLTS report crosses the wires—it offers one last glimpse of early-year labor market trends, but with all the February jobs data in the books, JOLTS may not move markets all that much this time.

All macro eyes will be on Wednesday’s CPI report. The consensus calls for a 0.3% rise in both the headline and core rates, bringing the YoY figures to 2.9% and 3.2% respectively. Core CPI has been 3.2%-3.3% since last June, stubbornly above the Fed’s 2% (PCE) target. Elevated inflation stems primarily from imputed prices related to shelter and insurance, and real-time measures of those spots appear better. The Truflation gauge, a private-market instant consumer price estimate, shows low inflation of just 1.4%. CPI and PPI could be market-clearing events that, given recent volatility and fears of imminent tariff-induced inflation, could be a bullish catalyst as we head into a strong seasonal stretch for stocks.

PPI hits Thursday morning at the same time as the weekly jobless claims data. Once PPI is in hand, economists will have a good beat on what the February PCE Price Index will show. The week wraps up with a first look at the UMich Sentiment Survey after the bell on Friday. Our team thinks it will be another set of hot inflation expectations along with downbeat sentiment. We also assert that the stock and bond markets will look past it since it has become so politically charged. Along with UMich, we’re eyeing the AAII Investor Sentiment survey a bit closer—its findings underscore extremely pessimistic feelings about where stock prices are headed in the next six months, which is a bullish contrarian indicator.

Fiscal Policy Framework

President Trump faces pushback from Senate Republicans over his stern tariff executive orders and America First agenda. Senators Cassidy from Louisiana, McConnell from Kentucky, Collins from Maine, and Tillis from North Carolina have voiced opposition to tariffs, suggesting that the US does not have international leverage. Some GOP mutiny comes after Trump granted a one-month extension on imported goods compliant with the USMCA. Ford (F) and General Motors (GM) were particularly pleased with last Wednesday’s White House announcement that automakers could escape tariffs for another month.

As it stands, the US is set to impose a 25% import duty on steel and aluminum from all countries, effective Wednesday. The action would expand the original Section 232 tariffs by ending all country exemptions and raising tariffs from 10% to 25%. 

In the house, GOP lawmakers are pushing for a full-year continuing resolution (CR) to fund the government through September, despite Democratic outcries. President Trump is working with Republicans, including the Freedom Caucus, to extend the CR until October 1. Mentioned earlier, the March 14 government shutdown date looms, but there’s only about a 1-in-4 chance of a shutdown today. House Democrats prefer a short-term funding measure to allow for bipartisan negotiations and louder voices against Trump’s moves on trade, DOGE spending cuts, and overall executive power.

Risks and Opportunities

The VIX rose to 26.50 at the high last week, but that’s usually not good enough to mark a washout. A Friday afternoon rally on the heels of calm comments from Fed Chair Powell assuaged some fears, but we still expect volatility to run high. March, like October, has a penchant for amplifying equity market swings, so we may ultimately see that capitulation-like event in the coming weeks. 

Volatility in the currency markets could certainly be the catalyst—macro hedge funds tend to see forced liquidation when we see multiple-percentage-point daily changes among major FX pairs. It’s also important to call out that many Nasdaq stocks peaked the day the yen bottomed last July, and USDJPY has fallen further in recent weeks. So, we’ll track the currency markets closely in the sessions to come. Not helping matters for the bulls are increased recession risks from the sellside and reduced US GDP forecasts.

Opportunity lies in the so-called Fed put, however. As macro conditions deteriorate, odds of a rate cut jump. It would take something major to bring the March meeting in play, but the chance of a May ease is now up to 50/50; three quarter-point cuts are priced into 2025.

Quick Hits

• Health Care was the only sector up last week, and it leads YTD with Tech and Discretionary lagging sharply

• The 10-year yield has support at 4.1% while 4.4% is resistance

• The European stock index is off to its best start to a year this century

• The US Dollar Index settled at its lowest level since November 4 last Friday

• Despite President Trump holding a crypto summit last week, bitcoin remains in the mid-$80,000s

• US retail gas prices are the lowest they have been at this time of year since 2021 while wholesale egg prices have declined by almost 20% to the lowest since January 25

• Treasury Secretary Bessent: “The market and the economy have become hooked, become addicted, to excessive government spending and there’s going to be a detox period.”