March Outlook: Hang Tight It’s All About Inflation Expect Post-Election Chop

Seasonal: Neutral. Usually a solid performing month, March has tended to be softer in post-election years as it is the last month of the historically weak Q1. 

Fundamental: Mixed. Inflation remains a major issue for the market. Growth is cooling as the revised Q4 GDP was essentially unchanged at 2.3%. Slowing growth has allowed longer-term interest rates to retreat modestly, but they are not likely to fall much further without a reversal in recent inflation data trends. Tariffs and rapid-fire changes by the new administration only further sour the market’s mood.

Technical: Testing Support. The DOW, S&P 500, and NASDAQ have all slipped below their respective 50-day moving averages. NASDAQ’s chart is weakest as it has fallen through its January low. S&P 500 appears to be headed toward a retest of its January low. The DOW is least bad with the greatest breathing room until its January low. Key levels to watch first are around DOW 42300, S&P 500 5835, NASDAQ 18350. Should these levels break, the odds of a Q1 correction (at least a 10% pullback from recent highs) increase.

Monetary: 4.25 – 4.50%. The Fed has struggled to contain inflation, and progress appears to have stalled. January’s reading of Personal Consumption Expenditures (PCE) was in line at 2.6%. Current market expectations for the next Fed interest rate cut are not until its June meeting. At this juncture, this seems a bit optimistic given the recent trend in inflation data.

Sentiment: Souring. According to Investor’s Intelligence Advisors Sentiment survey Bullish advisors stand at 44.3%. Correction advisors are at 31.1% and Bearish advisors number 24.6% as of their February 26 release. Patience may be wearing thin for the market. A feeble and failed break-out attempt has many traders and investors reassessing the overall market. Should technical support fail, sentiment is likely to become even darker. It is important to note that the sentiment extremes associated with historical market lows still have not materialized. Current sentiment suggests caution remains a prudent course.

President Trump is shaking things up like never before. As promised Trump 2.0 has put the federal government, domestic politics and global affairs on their heels. His transactional, art-of-the-tariff tactics has the market on edge. But the reality is that the S&P 500 and NASDAQ 100 just hit new all-time highs last week.

While the Trump administration may have the world on the run and stocks nervous at the moment, inflation is still the likely main driver of the market. That January low was triggered by inflation fears from a blowout jobs report. So for now it’s all about inflation. With the PCE numbers coming down from December and in line with expectations perhaps we have gotten most of the willy nilly selling out of the way.  That doesn't mean we are out of the woods though. I have warned that a 10% correction is possible this year, but perhaps not at this juncture. I believe that as long as we stay at 0.3% or better on a monthly basis annual inflation is projected to trend down over the next five months. This will also keep the Fed on track for one or two rate cuts in the second half of the year. Tamer inflation will increase the likelihood of more cuts earlier. But for now, I don’t expect a cut before June. The fear on The Street is palpable and it’s hitting levels associated with interim lows and rebounds. I have previously written that this type of chop and volatility is to be expected in post-election years, especially in Q1. New republican administrations tend to come in and get down to brass tacks more so than new democrats. This generates market uncertainty and Trump 2.0 has moved faster and further and covered more ground than any I can remember. If the market fails to recover soon, we may be in store for some old school weak Republican President post-election year performance. For now, the January 13 S&P 500 intraday low at 5773.31 has held. The market remains in an uptrend with major support at the 200-day moving average around 5734, which is still only a 6.7% correction. Historically fairly normal. 

*Source: The Stock Trader’s Almanac