Buy? Now?

Is Scott Bessent a Contrary Indicator?

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Treasury Secretary Scott Bessent is trash talking the U.S. economy. He said last Friday that consumers and businesses will need to endure a “natural adjustment” as they transition from a public to a private driven economy. Bessent added, “The market and the economy have become…addicted, to excessive government spending, and there's going to be a detox period.” When asked whether the sharp drop in both 10-year yields and crude oil could be a sign of economic weakness rather than pricing in the president’s agenda, he replied, “We could have the worst of all worlds.” Finally, when asked when this “temporary pain” could end, Mr. Bessent refused to offer an expiration date. However, the week prior, he said that he believed it would take 6-12 months to get to “Trump’s economy.” If that is the case, equity markets could be in for a sustained period of pain, more than just a “little disturbance,” as the President put it.

This puts Bessent in lockstep with the AAII Investor Survey, which shows that almost 60% of retail investors have become more conservative in their investment approach. Could everyone’s panic have set up an opportunity? We note:

·       The CNN Fear and Greed Index last week hit lows that in the past have generated 15-20% rallies;

·       10- and 20-week cycles pinpointed last Thursday as a low, and so far, Thursday is the lowest close of the selloff.

·       Seasonals target an early March low

·       The NASDAQ 100’s decline exceeded 10%, and weekly volume across all stocks has hit extreme levels. That combination triggered a sell climax buy signal that we last saw at the COVID March 2020 lows.

Therefore, while there is a possibility for a sharp rally, is it time to increase exposure for longer term players? The payroll data argues against it because the reference period was before the Federal layoffs started, and part-time workers for economic reasons in the private sector are hitting three-year highs. The NFIB Small Business Survey’s compensation plans are also back to multi-year lows. At a minimum, use this yardstick: support from two weeks ago and resistance last week in 5850 in the S&P 500. We need to clear that at a minimum before anyone other than a trader can consider buying. 

Michigan vs. New York

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NY Federal Reserve President John Williams was skeptical. He said the University of Michigan Survey’s 5-year Inflation Expectations data can generate false signals, dismissing its recent upward spike. This is an important criticism because that data series is getting all the attention lately from investors and several Federal Reserve voters noted the rapid increase in consumer inflation expectations. We explored it and found that their sampling technique polls different groups over time, which can create random fluctuations from one month to the next. Therefore, we understand where President Williams is coming from.

It first appeared as though Williams was engaging in a bit of favoritism when he said he preferred his own NY Fed’s Survey of Consumer Expectations (SCE). While he may be trying to keep it in the family, it does have a more sophisticated approach than the University of Michigan phone survey that began in 1946. The SCE is a “national…internet…survey of a rotating panel of approximately 1,300 household heads. Respondents participate in the panel for up to 12 months.” This creates a consistent pool of the same consumers so changes in this indicator would be more significant than the Michigan poll. SCE’s results? One, three, and five-year median expectations are all at 3.0%, with one-year expectations in a tight range between 2.9%-3.3% for the past two years, and three-year inflation expectations have not exceeded 3.0% for even longer than that. The series for five-year inflation expectations that puts it on the same footing as U Michigan’s long-term expectations only started in January 2022, but it also has never printed above 3.0%.

This makes the SCE survey the key series to track. Williams will push back on any Federal Open Market Committee (FOMC) discussion about high inflation expectations if his bank’s index remains stable. If the market’s fear is wrapped up in a flawed data series, then that opens a window for opportunistic investment.  

Not In Their Vocabulary

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Three major Fed voters, Chair Powell, Governor Christopher Waller, and our friend John Williams, made it clear they are turning away from Keynes and Friedman and embracing Buddha. They are happy to sit and meditate, believing tariffs are not worth acting on yet. When they discuss them, they describe tariffs as a one-time price increase, and the central bank can “look through” them. In contrast to other FOMC voters, Powell and Waller agree with NY Fed President Williams that measures of longer-term inflation expectations remain “stable and consistent with our 2 percent inflation goal.”

Listening to them, it seems like the Fed will never hike again. The three that form the core of the FOMC were in unison that monetary policy needs to be set considering all four major policy programs: trade, immigration, deregulation, and taxes. Our guess is they think the fixed income market is too focused on the stagflationary impact from immigration and especially tariffs when expecting three rate cuts this year.

This monetary trinity’s mantra was summed up by Chair Powell: “we are focused on separating the signal from the noise…we are well positioned to wait for greater clarity.” He did slip in a fast one, agreeing with us when he established the condition when tariffs cannot be ignored: “What…[matters is]…longer term inflationary expectations.” Investors remember they were burned once before by the stubborn insistence of this central bank that inflation was transitory. If the FOMC consensus is to be complacent despite stagflationary concerns circulating around the Committee, then capital may continue its pilgrimage away from the U.S. asset markets.

What to Look for This Week

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1. Big week, kicked off by the January JOLTS Job Openings and Labor Turnover Survey on Tuesday, March 11 at 10:00 a.m. D.S.T. The key statistic for investors is the Hirings Rate, which has been in a downtrend then stuck at 3.4% throughout H2 2024. Any further weakness Tuesday would be problematic because unless hiring picks up, fired government workers will have a hard time finding work in the private sector. 

2. Wednesday, March 12 at 8:30 a.m. D.S.T February Consumer Price Index. The February Producer Price Index is released Thursday March 13 at 8:30 a.m. The core inflation measure of Final PPI ex-food, energy, and trade services has only been moving up gradually since its November 2023 low, and the last two months have fallen. We will look at this as well as intermediate goods PPI this year to track the influence of increased tariffs.

3. Perhaps the most anticipated economic indicator this week is on Friday March 14 at 10:00 a.m. D.S.T. when the February Preliminary University of Michigan Consumer Survey is released. The focus will be on long-term 5-year inflation expectations, which was revised up to new high of 3.5% last month. The stock market will move inversely with this number—a drop will push equities higher.  

FOMC Voters Speaking: We are within the blackout period for the March 18-19 FOMC meeting.