March 2025 Market Strategy
The growth scare is finally here and it's finding its way into investor sentiment. Some may see signs of capitulation. But a much bigger narrative shift will be necessary to provide a buyable dip.
Disclaimer: The information contained in this article is not and should not be construed as investment advice. This is my investing journey and I simply share what I do and why I do that for educational and entertainment purposes.
In my February 2025 Market Strategy, I highlighted that the latest deficit acceleration seemed to have finally made it into the CPI and that its continuation depended on whether a fiscal cliff actually materialized or not. I also emphasized that investors had little concern about such a fiscal cliff which suggested that this risk may not have been priced properly. And finally, I pointed to a potential resurrection of the Eurozone, the biggest beneficiary if the Ukraine war ended.
Let’s check how the picture has evolved since then.
TLDR Summary
The latest CPI print was unproblematic which eased reflation fears. However, recession fears have hit markets quite powerfully over the last month which took the S&P 500 down by 10% briefly. It seems that 1Q25 will see a contraction in real GDP, the first one since 1Q22. Both lower inflation and lower real growth may be the result of a fiscal cliff materializing. The Treasury’s deficit is still tracking ahead of prior fiscal year. But the gap is narrowing. And Trump’s cumulative deficit since inauguration is about $20bn lower than during the same period last year.
The Fed has acknowledged cooling economic growth, but so far is not willing to cut rates. It seems likely to me that markets will force them soon. And then we will see how much their rate cuts can really do to calm markets. I have doubts about that as I have discussed in great detail in recent months. I believe rate cuts will accelerate the unwind of the Fed’s SuperCycle.
Investor sentiment and positioning is sending cautious capitulation signals right now, which may help drive a near-term bounce, especially if tax refund season injects savings into the private sector. Institutional investors have greatly reduced their allocation to stocks, especially to the US and technology segments. However, the latest survey results may be noisy as macro is quite political right now. The ultra low cash level and limited rate cut expectations suggest that there may be less macro pessimism out there than what the global fund manager survey shows in other sections.
Overall, it seems to me that the consensus is that any economic weakness will be short-lived and that it is primarily a policy choice of the current US administration that can (and will) adjusted once necessary. Assets have not rerated to permanently different growth expectations. I believe that we are in a process to adjust the nominal growth trajectory of the US economy downwards. If that proves to be correct, the real market adjustment is yet to come. This is not a BTFD moment for me.
Recession watch
GDPnow is still forecasting a significant GDP contraction this quarter, with the latest update pointing to -1.8% in real GDP growth.