Abdelrahman
A forthcoming film titled “Novocaine,” set to release next month, tells the story of a man with an unusual ability: he cannot feel pain. While this seems like a superpower, it quickly turns dangerous as he suffers from an inability to sense harmful injuries. Similarly, the stock market exhibited a notable calm for several weeks, unresponsive to numerous potential threats, until Friday, when the indexes sharply fell due to growing concerns over the economy’s slow growth, amidst a backdrop of fluctuating policies. Before the unsettling fluctuations on Thursday and Friday, the market enjoyed a phase of “immaculate rotation,” where different sectors took turns performing well, transitioning fluidly from growth stocks to value and back again. On Tuesday and Wednesday, buyer activity pushed the S&P 500 to rise by 0.25% to set marginal new record highs on both days. This doesn’t necessarily indicate robust strength, however. Warren Pies, co-founder of 3Fourteen Research, pointed out that while the index achieved a new record, only 5.5% of its components hit a 52-week high, a stark contrast to the historical average during such events. .SPX 1Y mountain S & P 500, 1-year This doesn’t predict imminent trouble, but it suggests a muted signal for future returns and increases the market’s vulnerability. I mentioned on CNBC Thursday that the market resembles a team known for close wins. While fans may see that as a sign of excellence, truly great teams minimize tight games due to their overall strength. (Sorry for the reminder, Chiefs fans.) Scott Chronert, a U.S. equity strategist at Citi, summed up the sentiment leading into Friday: “With rising interest rates, fewer cuts from the Fed, trade worries, and softer guidance despite strong Q4 results, we could have seen a more significant impact on the major indexes. Nevertheless, the market continues to hover around 25 times trailing earnings, indicating full valuation according to our [discounted cash flow] analysis, and has delivered a 3.8% total return year-to-date through Thursday’s close. Although expectations for 2025 are not as ambitious as back-to-back years of 20%+ gains, they’re still noteworthy. Overcoming strong investor sentiment will require more than what we’ve seen.” ‘Growth scare’ Whether this persistent risk appetite among investors was shaken by Friday’s 1.7% drop in the index—which was largely driven by consumer and industrial cyclical stocks while Treasury yields fell—will unfold next week. The decline resulted from an accumulation of factors, as is common with market pullbacks. A disappointing report on consumer sentiment from the University of Michigan revealed troubling expectations for household finances in the coming years alongside increasing inflation worries. Although unwelcome, this might have been overlooked as just a temporary political reaction, but it follows a series of cautionary signs, including Walmart’s conservative first-quarter guidance, a dip in January retail sales, a subdued services sector reading, and declines in some travel and dining stocks. Although no one is seriously predicting an imminent U.S. downturn from this data, it complicates the prevailing belief of “no economic landing combined with policy boosts” that was popular at the beginning of the year. It suggests we may see some softening in economic activity, especially with numerous proposals for federal layoffs, talked-about tariffs, and endangered spending cuts potentially leading to fiscal limitations before any expected regulatory or tax advantages materialize. Currently, the S&P 500 has retreated to levels initially reached in early December. Furthermore, once-reliable indicators of the cyclical-acceleration “Trump trade” — industrials, bank stocks, and small caps — have also pulled back to or below the gaps created by their November 6 rally following the election. This indicates a reevaluation of prices and assumptions, but it certainly doesn’t negate the broader bull market narrative just yet. Facing tough seasonality ahead Pies from 3Fourteen has been alert for a “growth scare” since the beginning of the year. This doesn’t imply a recession or the end of a bull market, but rather a more cautious phase prone to fluctuations and downside challenges. He recently updated his 2025 outlook, cautioning that “our concern regarding a convergence of negative seasonal patterns, a potential tax burden, disappointing spring housing data, and a precarious March Fed meeting is not alleviated by the new highs achieved by the S&P this week.” The negative seasonality refers to a historically less favorable trend beginning in the latter half of February, which Goldman Sachs’ institutional-equity strategist Scott Rubner highlighted as a reason to adopt a pause on his bullish stance and remain vigilant for a market correction. Seasonal influences, however, are just background factors and not guaranteed future events, with previous discrepancies between historical trends and actual market performance, some occurring as recently as last year. Seasonal weakness should not act as a reason to abandon risk but rather help set realistic expectations moving forward. Rubner also noted that the strong demand from retail traders appears to be waning, likely aggravated by sharp declines in several high-flying stocks popular among smaller investors. Palantir experienced a significant 15% drop last week, Robinhood fell 20%, and Tesla is currently down 30% from its peak two months ago. Bitcoin also missed the chance to join the Nasdaq in reaching new highs last week. Overall, investor sentiment is complex. Strategas Research reports that the recent flow of equity ETF inflows has exceeded the 90th percentile of historical averages, and put-call ratios indicate a strong inclination towards bullish bets. However, surveys of investor attitudes, likely influenced by fluctuating policy developments, are showing increased levels of bearishness, particularly given the market’s proximity to record highs. The late-week volatility likely encouraged a more prudent skepticism and may have helped reduce some of the speculative excesses in certain market areas. Friday sell-offs The week concluded with the S&P 500 ending lower for the fifth consecutive Friday since the inauguration. Whether this is purely coincidental, it contributes to an ongoing narrative of pre-weekend anxiety regarding the uncertain direction of a new administration moving to alter government structures, threaten trade partnerships with tariffs, and reassess military alliances. Thus far, the market has maintained discipline in evaluating policy impacts specifically in areas closely related rather than on a broader market scale. Even with these consistent declines on Fridays, the S&P 500 has enjoyed a 2.4% annual increase and is just 2% below its peak. Earnings have surpassed expectations with over 75% of companies delivering better-than-expected results, although forward guidance remains cautiously optimistic overall. Credit markets have not raised any significant alarm. A drop like Friday’s, bringing the index to its 50-day moving average, doesn’t signal severe trouble in most market contexts. For a market grappling with the conflicting expectations and high valuations, interacting with a cautious Federal Reserve and a hesitant consumer, things still appear quite routine for now, even if the process isn’t entirely smooth.
