Weekly Newsletter March 31st to April 4th
RECAPPING LAST WEEK
Risk assets plunged around the globe as larger than expected tariffs imposed by the U.S. along with retaliations by major trading partners such as China stoked recession fears. After a modest rally to begin the week, the S&P500 index tumbled nearly 5% on Thursday and another 6% on Friday, finishing 9% lower overall. The Nasdaq Composite sank 10% as technology stocks were hammered, while the Russell 2000 also lost 10%. The Cboe volatility index soared above 45—a level not seen since August—implying an expected daily move greater then 2.8% for the S&P500 index. Crude oil prices plummeted more than 9%, dragged down by fears of a global trade war along with OPEC’s surprising decision to increase oil output by a higher-than-expected 411,000 barrels per day starting next month. Investors flocked to the safe-haven of fixed income investments, sending the 10-year U.S. Treasury yield below 4% for the first time since October. The U.S. dollar fell sharply against other global currencies, reflecting concerns that a trade war could impact domestic growth more than other economies. In a speech Friday, Fed Chair Powell said he expects tariffs to raise inflation and slow economic growth, but indicated the FOMC won’t move on interest rates until the impacts are clearer. Turning to other economic news, U.S. job growth was stronger than expected in March, providing at least a temporary reprieve from the flood of negative data. Nonfarm payrolls increased by 228,000 with the unemployment rate ticking up only slightly to 4.2%. Layoffs surged last month and in the first quarter according to the Challenger report but have not shown up in the official labor market data as court cases contesting the firings are pending. The ISM manufacturing PMI slipped into contraction for the first time this year, registering a 49.0 reading in March. The prices paid index jumped to the highest level in nearly three years, and survey participants indicated much uncertainty. Growth in the services sector stalled as the ISM’s measure of employment contracted for the first time in six months. Overseas, Europe and other developed markets gave up most of their gains for the year. The MSCI EAFE index sank more than 7% as the realities of a potential trade war set in. Inflation in the Eurozone edged lower in March, lifting expectations for another rate cut at the next central bank meeting later this month. The Reserve Bank of Australia opted to keep interest rates unchanged and wait for upcoming inflation and labor market data before committing to future rate cuts. Finally, China’s manufacturing and services sector activity showed promise last month, according to the official government and Caixin PMI surveys. Rising trends in new orders and employment may have represented temporary lifts ahead of last week’s tariff news.
THE WEEK AHEAD
The fallout from tariff announcements and responses from trading partners will continue to be top of mind, while investors also consider fresh U.S. inflation data. The tariffs significantly increase downside risk to U.S. economic growth since they generally focus on items that affect a broad swath of consumer spending. On Thursday, March’s CPI figures are expected to show a slight decrease from the prior reading, but last week’s PMI reading revealed worrisome inflationary trends in U.S. manufacturing prices. Minutes from last month’s FOMC meeting emerge Wednesday, but they may not hold much relevance given last week’s developments. More attention will likely be focused on what FOMC members have to say in their speaking engagements this week. Auctions for 10- and 30-year Treasuries will be closely monitored for any changes in demand, especially from foreign buyers. Friday’s preliminary consumer sentiment reading for April will include updated inflation expectations, which have shot up recently to levels not seen in several decades. Other releases on the domestic economic calendar include consumer credit figures, producer prices, and small business sentiment. On Friday, first-quarter earnings season gets underway with reports from some of the large U.S. banks. On the international calendar, the main data points are the UK’s monthly GDP update on Friday and China’s inflation release Wednesday evening.
CHART OF THE WEEK
Tech wreck
At the end of last week’s collapse in U.S. equity markets, some signs of capitulation emerged. Friday’s decline was among the worst breadth days in the last 60 years, registering a Major Distribution Day in terms of both declining issues and volume. From a technical perspective, the Nasdaq-100 index (NDX) experienced a drop of more than 20% from the February 19 high to Friday’s low. In last week’s webcast we dove into Fibonacci tools, which can be useful for projecting potential targets during sharp moves like the market is currently experiencing. There are two Fibonacci extensions that align near the August 2024 low as a potential support level. Measuring the first drop from the highs and projecting that move from the retracement high on March 25 produces a potential target of around $17,200. Measuring the smaller move from March 25 to 31 and projecting that from the April 2 high produces the commonly used 161.8% extension, also at $17,200. Surprisingly, the 50- and 200-day exponential moving averages haven’t experienced a bearish cross yet due to the speed of the drop, but that outcome seems imminent. Breadth washouts can lead to fast and fierce rallies in this environment, but it’s important to remember that much damage has been done to the longer-term trend.
Source: Charles Schwab Corporation
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