S&P 500 hits correction territory

​This week, the S&P 500 entered correction territory, closing on Thursday at 5,521.52—down 1.4% for the day and over 10% from its February 19 record high of 6,144.15. This marks the first correction since 2023, ending a 343-day streak without such a decline, nearly double the historical average between corrections. The downturn is largely attributed to escalating trade tensions, particularly President Trump's recent tariff threats against European imports, which have heightened investor concerns about potential inflation and economic slowdown. In response, investors are seeking safer assets, leading to increased demand for U.S. Treasury bonds and gold, the latter nearing the $3,000 per ounce mark.

• While a 10% correction is normal and generally considered healthy, this was the 7th fastest such decline in history
• Thus far, it seems markets are reacting to the uncertainty of Trump’s tariff policies
• That said, it is important to note that the advance during the prior two years was largely due to the Mag 7 stocks, which, as we have written about before, is not healthy
• As we approached the recent market top, the Mag 7 was already starting to show signs of strain, with most declining significantly more than the overall market
• Underneath the surface, it does seem like there is a serious rotation happening, with sectors that previously underperformed (Healthcare, Energy) actually up on the year, and the previous leaders (Consumer Discretionary, Technology) having the worst performance
• Whether or not this is the beginning of a bigger bear market in stocks or just a brief blip will be determined by the strength of the economy, which has shown recent signs of weakness
• The biggest risk to the market right now is if we enter a recession while inflation stays elevated, otherwise known as stagflation

Consumer confidence plunges, inflation expectations spike

​The University of Michigan's consumer sentiment index fell to 57.9 in March, down from 64.7 in February, marking the lowest level since November 2022. This decline is attributed to rising concerns over President Trump's trade policies and potential inflationary effects. Notably, long-term inflation expectations have surged to 3.9%, the highest since 1993, while one-year expectations rose to 4.9%. The report indicates that frequent policy changes are making it difficult for consumers to plan for the future.

• Relatedly, given our economy is consumer-driven, the consumer sentiment reading this morning is somewhat troubling
• It seems the consumer, similar to the market, is feeling uncertain about Trump’s tariff policies and what they mean for prices of goods and services
• Although the official inflation reading (CPI), which was announced earlier this week, has stayed in the neighborhood of 3%, consumer expectations seem to be higher
• This could develop into a self-reinforcing mechanism, as consumer behavior adjusts based on their expectations (i.e. consumers choose to spend now rather than wait if they are expecting prices to be higher)
• It will be important to watch how this feeds through to actual prices in the coming months

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