Weekly Investment Update (03/14/2025)

The S&P 500 index retreated nearly 3% during the week amid concerns that additional tariffs may be implemented on major trading partners such as Canada and the European Union. President Trump’s comment that he is willing to tolerate short-term economic pain in exchange for achieving long-term objectives is very different from the message he conveyed in his first term, when it was clear the stock market was an important gauge of success. We do not believe the administration is willing to cause a recession, particularly when considering the negative impact that could have on Republicans in the 2026 midterm elections.

For example, on Tuesday, President Trump announced 50% tariffs on Canadian steel and aluminum imports, but then quickly lowered the number to 25% after Ontario province suspended plans to add a surcharge on electricity to some northern U.S. states. That said, the base case outcome for tariffs is likely more negative than consensus expectations coming into 2025. This jeopardizes both economic growth and corporate earnings, and markets are trying to price in this additional risk.

For now, fundamental economic data is encouraging despite the headlines. JOLTS job openings rebounded to 7.7 million and surpassed expectations while initial jobless claims were lower than forecasted. Inflation numbers were softer across the board with both the CPI and producer price index (PPI) surprising to the downside. As a result, the futures markets have now repriced expectations to three Fed rate cuts, consistent with our view that there will be at least two rate cuts in 2025.

Market Volatility: A Case for Near-Term Stability

What is happening: This week, investors continued to digest a flurry of market-moving headlines — from key macroeconomic data to less tangible/predictable news out of Washington. On balance, worries over austerity measures (DOGE), areas of weaker earnings guidance, and volatile trade policy headlines overwhelmed news of inflation moderating more than expected in February and discussions of a possible cease-fire in the Ukraine-Russia war.

As a result, nine of the 11 S&P 500 sectors were down at least one percent for the week. However, year-to-date, seven of these sectors are still positive, and various technical indicators suggest the market may be approaching levels of near-term support. For example, on Monday, 25% of the S&P 500 dropped by 2-standard deviations — often a sign of stocks approaching oversold conditions. Further, although we haven’t seen the typical spike in put-option (protection) purchases that one might expect near a market low, we’ve seen a large spike in “inverse” ETF purchases, which allow investors to bet on market declines — another potential sign of overly negative sentiment.

Why it matters: What matters most during periods of heightened market volatility is determining whether activity is being driven by shifts in sentiment or an increased likelihood of fundamental deterioration. The former can be short-lived and often prove to be a buying opportunity. The latter can be more concerning as recessions are often associated with the most severe market declines.

One way to measure this relationship is to compare the Fiscal Policy Uncertainty Index (a measure of uncertainty and fear around the impact of policy) to investment-grade credit spreads (a measure of market fundamentals). This year, we have experienced the largest spike in fiscal policy uncertainty relative to credit spreads since 1990. Simply put, uncertainty has risen while fundamentals have yet to show any material signs of stress. We saw a similar spike in 2011 after the U.S. debt downgrade. The market declined 15% but bottomed after only two months. Conversely, stock volatility in 2022 was accompanied by a more noticeable deterioration in credit conditions, leading to a nearly 30% decline in the S&P 500 over the course of eight months.

Bessemer portfolio managers are looking to take advantage of recent volatility given the stable nature of market fundamentals. Any deterioration in the actual or perceived trajectory of economic or corporate fundamentals would cause us to reassess our views on risk.

Soft CPI Supports Disinflation Trends, Tariffs Continue to Pose Uncertainty

What is happening: The February CPI report came in below expectations, with the headline figure easing to 2.8% year-over-year, and the core rate, which excludes volatile food and energy prices, moderating to 3.1% year-over-year, its lowest level since April 2021. The downward surprise was partially driven by a deceleration in transportation services inflation, with airfare prices falling 4.0% month-on-month, while motor vehicle insurance prices also slowed sharply from January.

Shelter prices continued to be a source of upward price pressure in February, representing nearly half of the monthly CPI gain. Although shelter prices remain elevated, they are showing signs of moderation, with rent and owners' equivalent rent nearing pre-pandemic averages. Real-time market data indicates rental prices should ease, which we expect to be reflected in CPI data in the coming months, alleviating some of the inflationary pressure.

Why it matters: February’s lower-than-expected CPI report is an encouraging sign of continuing disinflationary trends. January’s hotter-than-expected print looks to be an outlier, as has become common in recent years. Importantly, softer inflation provides the Fed with much needed flexibility to further reduce interest rates should recent policy uncertainty begin to have an impact on the real economy. We will be watching inflation expectations closely, as recent survey measures have shown a material increase. Furthermore, some of the softer components of the recent CPI report, like airline prices and motor vehicle insurance costs, do not directly feed into the Personal Consumption Expenditures index, the Fed’s preferred measure of inflation. Therefore, although we are confident in our view that the Fed will have the flexibility to cut rates multiple times this year, it will likely remain on hold at the March meeting, awaiting further clarity on fiscal and trade policy.