Market Update
1. Exactly a month ago, Europe was outperforming the U.S. year-to-date by over 7% (8.2% to 1.1%). Today that spread is less than 2% (-4.4% to -6.2%). As bad as things have been here in March, overseas it has been worse (except for Latin America). Asia saw their 14% rally erode, settling with only a 1.5% gain. A lot of this is currency, but if you are a company and your energy costs are up 50% or more, your profit outlook has taken a substantial hit.
2. So far, credit spreads have stayed fairly tight. For all the hand-wringing about private credit woes, investors are not even bailing on CCC-rated bonds yet, let alone the BBs and Bs that most high yield and strategic income funds own. Credit holders are not panicking. This suggests that if we were able to contain the Iran/Straits of Hormuz situation before too long (say, mid-April) that the economy would be okay.
3. The biggest stock “carnage” continues to be in the growth/technology area. Software-as-a-Service still can’t find a bottom, and weakness is spreading to other areas of the tech sector. Even semiconductors (the leading tech sub-sector) are now more than 10% below their February 25 highs. Value stocks, because of their exposure to Energy, Utilities, and Consumer Staples, are still positive YTD. Value would be stronger if one excludes the Financial Services sector, which is off 10%. Stocks seldom do well as a whole when financial stocks are lagging this badly.
4. The 200-day simple moving average of the S&P 500 is 6616. The index is now flirting with 6400. The 200-WEEK moving average is at 6425, so we will probably see a rally attempt around current levels. A failure to hold 6400 might send us fairly quickly to the 6100 area.
5. Gold made its high on January 29th. Its move was parabolic in January until the two-day, 16.2% collapse. Its February rally fell well short of reclaiming its previous high, and it has now declined below the February 2nd sell-off low, which indicates that gold is in a correction at the very least. It is possible that gold is entering a bear market and the January highs will last a long time. On the other hand, gold mining stocks did make a new all-time high at the end of February, so despite the fact that that they have declined 30% from those highs, they are technically still in an uptrend. In the context of more than tripling from January 2025 to February 2026, a 30% decline is just a “pullback”.
6. I don’t know why oil prices tend to follow gold prices (with a lag of several months), but they sure seem to. David Ranson of HCWE Research was the first to point this out to me, so a hat tip to him. With the superior performance of “hard” assets like gold, silver, copper, oil, uranium, etc. since the middle of 2024, those that have suggested that this decade will favor hard assets over financial assets (stocks and bonds) are looking pretty good. Real estate is a hard asset that really hasn’t done much this decade. Maybe it will have its turn as well.
7. Financial markets wonder if there is a “Trump put” – or a level where Trump will modify his behavior or policies to support the stock and/or bond markets. Given yesterday’s extension of the attack pause for another ten days, I think the level of 6500 on the S&P 500 was where the Trump put was. Below that, I think Trump feels constrained against acting aggressively. I also would watch 4.5% on the 10-year Treasury bond. Bad things start happening for borrowers above that level, and I’m sure his Treasury Secretary has pointed that out to him.
8. I really believe that Trump saw the conflict with Iran as a boxing match, where America was a heavyweight and Iran was a lightweight and America could just punch Iran into submission. I believe a better analogy is that America is an adult and Iran is a 6 year-old and we just punched it several times in a Wal-Mart. Iran is now seeing how much it can scream and carry on and make life difficult for the other adults, who presumably can impact America’s behavior. Children tend to learn fast where they have leverage and where they don’t, and Iran is the same way. I think there is some awareness now in the Administration that they have a 6-year-old-in-Wal-Mart situation, but they are still desperately trying to get out of this with a big win, and I’m not sure that is possible at this point.
9. The way I’m thinking about portfolios now is shorter duration in bonds with an emphasis on mortgages and structured credit over corporate bonds. I would also be temporarily reducing my international currency exposure (bonds and stocks). I have and would continue to trim emerging market equity exposure outside of Latin America. As far as U.S. stocks go, I would be modestly underweight, especially to financials and consumer durables (retailers) because I think rising energy prices are hitting peoples discretionary spending. I like the energy sector but the big oil majors have had a big run-up so I wouldn’t go there; pipelines might be a better bet.
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