The Bear Thread

March Not as Strong in Post-Election Years

As part of the Best Six/Eight Months, March has historically been a respectable performing month with DJIA, S&P 500, NASDAQ, Russell 1000 & 2000, advancing more than 64% of the time with average gains ranging from 0.7% by Russell 2000 to 1.1% by S&P 500.

Post-election year payments to the Piper have exacted a toll on March as average gains are trimmed. (see Vital Statistics table below). In post-election years March ranks: #7 for DJIA and S&P 500; # 8 for Russell 1000 and Russell 2000; and #9 for NASDAQ. NASDAQ also has the largest change in its average performance, dropping from +0.8% in all Marchs since 1971 to a loss of 0.1% in 13 post-elections years. NASDAQ’s massive 14.5% drop in 2001 is only partially offset by its impressive 10.9% advance in 2009.

 

Beware The Ides of March

Rather turbulent in recent years with wild fluctuations and large gains and losses, March has been taking some mean end-of-quarter hits. In post-election years since 1950, March has tended to open strongly, and strength has generally persisted until shortly after mid-month (dashed arrow below). At which point, the major indexes lost momentum and closed out March with some choppy trading. Whereas over the recent 21 years March has trended lower through mid-month then rallied in the second half.

March packs a rather busy docket. It is the end of the first quarter, which brings with it quarterly Quadruple Witching and an abundance of portfolio maneuvers from The Street. March Quad-Witching Weeks have been quite bullish in recent years. But the week after has been nearly the exact opposite, DJIA down 22 of the last 37 years—and often down sharply.

 

Claims in the Capital
Thu, Feb 27, 2025

It was a big day for scheduled Thursday releases. For starters, weekly sentiment data showed a huge spike in bearish sentiment (which we covered in today's Chart of the Day and Morning Lineup), and among the economic data releases, jobless claims experienced a notable spike. For seasonally adjusted initial claims through the week of 2/22, claims totaled 242K, up 22K from the previous week's upward revision of 220K. As shown below, at those levels, claims have returned to the upper end of the past few years' range with this marking the largest single-week increase since a 35K surge in October.



Before seasonal adjustment, claims totaled 220.5K. That is up versus the comparable week of the past two years and is more in line with levels from February 2022, meaning that claims are up relative to recent years but not extraordinarily high. On the bright side, claims are moving in line with seasonally normal patterns, as shown in the second chart below. Claims will likely continue to have these seasonal tailwinds out through the spring.



Nationally, claims are higher, but it is hard to classify it as too much of a concern- yet. Additionally, state-level data offers some insight into the uptick. Among many changes, thanks to the new administration taking office, the federal government has been getting a shake-up from audits from the Department of Government Efficiency (DOGE). There have already been job losses as a result of these attempts to curtail government spending, which is showing up through DC area claims. We first noted the increase in claims in the Washington DC metro area in last Thursday's Closer, and the updated data one week later has reaffirmed more jobs have been lost. As shown below, claims from the capital have risen above 2,000 for the first time since Q1 2023, which was around the time of a looming debt ceiling standoff. Before that, the only other spikes of similar size or larger were the COVID period and the 2018-2019 government shutdown.



Of course, looking at claims in the DC area is only one proxy for the loss in government jobs. The Department of Labor also offers a look at claims filed in federal programs. These, of course, are a more direct look at government job loss. As shown in the first chart below, federal employee claims have generally trended lower over the past 15 or so years, having been near record lows (at the time of seasonal annual lows) in the past several years. This time of year usually sees an unwinding of a seasonal spike in claims, but this year, the opposite has been playing out, with claims continuing to move higher in the past couple of weeks.

In fact, the four-week moving average for federal employee claims has risen over 40% on a year-over-year basis. As shown in the second chart below, that spike hardly registers when put up against things like government shutdowns and recessions. One comparable spike worth mentioning, though, is from early 2021, shortly after Biden took office. That was another period with a notable spike in federal claims thanks to hiring freezes and employment reductions due to policy shifts moving from one administration to another. In other words, the recent DOGE job cuts have some very recent parallels.



Obviously, it's still early in the game. It's only been a little more than a month since President Trump's inauguration, so it wouldn't be surprising to see government-related claims continue rising as DOGE continues its auditing. With that in mind, federal employee continuing claims are right about where they were for this time last year. Additionally, like initial claims, those levels are at a seasonal inflection point and are considerably lower than what they have been in past decades.

 

When the Weekend Was a Good Thing
Fri, Feb 28, 2025

Through yesterday's close, the S&P 500's average daily performance during the second Trump administration has been a decline of 0.8%. The magnitude of the declines hasn't been spread out evenly across each of those days. The chart below shows the S&P 500's daily performance on every trading day since the inauguration, and we have also highlighted Mondays and Fridays in red. The days surrounding the weekend have been notably weak. Of the nine Friday and Monday sessions since 1/21, the S&P 500 has traded lower eight times for a median decline of 0.5%. These are some pretty weak numbers, but in the early days of this administration, we have seen no shortage of Friday afternoon and weekend headlines that the market has been forced to adjust to.



It's still extremely early in this administration, so the extreme weakness of the market on Fridays and Mondays could easily shift, but we found it interesting how much these numbers differ from average weekday performance under President Biden. During his four years in office, Friday and Monday were easily the best days of the trading week, with average gains of 9.8 bps and 8.5 bps, respectively. Just like in life, for the markets, no news is sometimes good news, and unlike the first few weeks of the second Trump Administration, weekends during the Biden Administration tended ot be quiet from Friday afternoons through early Monday.

 

Where's the Weakness in Discretionary?
Mon, Mar 3, 2025

Entering the final month of the first quarter, most S&P 500 sectors are sitting on year-to-date gains, although there are two notable exceptions. The Tech sector is currently down 5.29%, which has dragged on broader market performance, given it's by far the largest sector by market cap. Consumer Discretionary is down an even worse 5.65% year to date, and returns look even worse when compared to the December 17th high. Since then, the sector is down just under 12%. As shown below, using the sector ETF (XLY) as a proxy for the group, that latest correction leaves it in no-man's-land between the 50 and 200-day moving averages with the recent low finding some support around the November post-election low.



Taking a look under the hood, breadth since that December high hasn't been that bad. Of the 50 stocks in the sector, half are higher, and half are lower since the high. However, there is a far larger weight in the losers than the winners. Among the decliners are the sector's largest names: Tesla (TSLA) and Amazon (AMZN). Given that the S&P 500 is weighted by market cap, those declines in the mega caps—namely the outsized 38.4% drop in TSLA shares—have acted as significant drags on broader index performance.



Zeroing in on Tesla (TSLA), the stock peaked a day after the Consumer Discretionary sector, closing at a 52-week high on December 18. Regardless, it's been a brutal period of selling since then. The stock's nearly 40% decline saw it crash through its 50-DMA, and in the past few days, it has found support at its longer term 200-DMA.



Again, the S&P 500 and its sectors use a market-cap-weighted methodology, meaning stocks with larger market caps (like Tesla) will have a greater impact on the index than smaller peers. That also makes equal-weight versions of the indices useful in canceling out some of that noise and providing a better look at breadth. As shown below, whereas the market-cap weighted sector ETF (XLY) is down 9.6% from a 52-week high, the equal weight version (RSPD) is down less than 3%. Furthermore, whereas XLY looks like a falling knife, RSPD has just been bouncing sideways along the 50-DMA. The latest lows for RSPD came right at the uptrend line off of last summer's lows. So all together, while the weakness in the Consumer Discretionary sector may cause some alarms to go off as a sign of stress for the consumer, the current situation is more looking like a lesson in index weighting methodologies and mega-cap volatility.

 

Post-Election Years Plague Republicans

The fear on The Street is palpable and it’s hitting levels associated with interim lows and rebounds. We have warned all year that this type of chop and volatility is to be expected in post-election years, especially in Q1. With the S&P 500 dipping further into the red for the year, we turn to page 28 of the 2025 Stock Trader’s Almanac, “Post-Election Year Performance by Party.”

Historically, more bear markets and negative market action have plagued Republican administrations in the post-election year whereas the midterm year has been worse for Democrats. New republican administrations tend to come in and get down 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 we can remember.

 

Trump Tariff Turmoil Post-Election Year Plunge

Following up on Tuesday’s post with a deeper look from our member’s webinar yesterday into post-election year performance under new republican administration. Looks like President Trump is taking a page out of our 2025 Stock Trader’s Almanac 4-year cycle playbook. Updated chart highlights detail of the republican admins from table on page 28.

 

The Most Oversold Country in the World
Thu, Mar 6, 2025

In a post yesterday, we discussed the historic surge in German equities, which is even more historic when framed relative to US equity performance. We further discussed the topic of international stock outperformance concerning valuations in today's Chart of the Day. In the matrix below, we show the performance of 22 country ETFs since the US election in November, year to date in 2025, and month to date in February. We also show each ETF's distance from 52-week highs and where they currently trade relative to their 50-DMAs.

On average, developed markets have massively outperformed since the election and year to date. Whereas the former are up an average of 5.5% since November, emerging markets have averaged a nearly 5% decline. More recently, looking in the young month of March, developed markets are again collectively outperforming but by a much smaller margin. The single best performer and the only one currently trading at a 52-week high is Germany (EWG). EWG has risen an impressive 7% since the end of last week, bringing it deeply into overbought territory. However, that isn't even the most overbought country ETF. Hong Kong (EWH) is trading over 3 standard deviations above its 50-DMA for the country's most overbought reading since October. Meanwhile, all the way at the other end of the spectrum by pretty much each measure is the US (SPY). The S&P 500 has now erased close to all its post-election gains after falling the most of any country month-to-date. As such, it is also the single most oversold country ETF on this list.

 

March Madness Sets Up Ides of March Washout Bounce

Stormy March markets have battered stocks lower in the first half of the month in recent years. Named after Mars, the Roman god of war, the third month of the year often serves as a battleground for bulls and bears. Julius Caesar may not have heeded the famous warning to “beware the Ides of March,” but perhaps the bears should take heed this year, at least for a bounce.

Several key technical levels have been breached which unfortunately brings support around the September lows and last March’s highs in the 5300-5400 area into play. But a near term bounce is setting up for later this week or early next, though it will need some sort of catalyst from President Trump, the Fed, Congress, rates, inflation or geopolitics to trigger it.

 

Big Swings for Small Business
Tue, Mar 11, 2025

This morning's release of small business sentiment from the NFIB showed another month-over-month decline in the headline Optimism Index. The politically sensitive survey has shown that the headline index has managed to remain well above pre-Election levels, though the past two months have marked a dramatic drop. The index was at a high 105.1 in December thanks to a record increase after the election. In the two months since then, the index is down 4.4 points, which, as shown in the second chart below, makes February the 10th largest 2-month decline on record.



In the table below we show the readings for each category of the report including the 10 inputs to the optimism index in addition to the eight other indices. As shown, the latest drop has brought the index down from an 85th percentile reading to a 66th percentile reading. Breadth was notably weak with only three inputs rising month-over-month while the rest fell. Other categories were mixed with three increases, three declines, and two unchanged readings.



As previously noted, historically the NFIB survey has been sensitive to politics. The survey has shown small businesses to be more optimistic when Republicans are in power whereas sentiment has been weaker when Democrats are in power. As we discussed in today's Morning Lineup, some categories like labor indicators appear less sensitive. Expanding on this, below we have constructed indices within the report that are centered around observed or actual changes to the businesses (which in theory could be less politically sensitive) and expectations or plans (which would be more sensitive).

As shown, both indices got a boost after the election although plans and expectations saw a significantly larger jump, meaning small businesses' hopes were perhaps ahead of what was actually happening within their firms. Just as fast as it rose, that expectations index has pulled back sharply in the past couple of months. As a result, expectations continue to outpace actuals, although to a smaller degree than at the end of 2024.



In addition to the various categories of the report, the NFIB also has an Economic Policy Uncertainty index. This index tends to rise the most during election years, and given we are only a few months out from the election, this index has remained near historically elevated levels. As shown in the second chart below, the move over the past several months has been extremely volatile. The move in the past two months is similar in size to the two-month period leading up to last fall's election. Prior to that, the only moves of this size were observed in the summer of 2022 and in early 2016 before that.



Elsewhere in the report, there were other mixed signals which could cause some uncertainty outside of politics. The higher prices index ticked up meaningfully with a 10-point jump resulting in the highest reading since May 2023. However, the percentage of firms reporting inflation as their single biggest problem has fallen massively to only 16% versus a recent high of 25% last summer.



For the cohort of businesses that reported lower earnings, inflation was the second most common response accounting for 10% of respondents. That is still well below the past few years' range, and plays second fiddle to sales volumes, which rose to 16% to match last October and November 2023 for the highest reading since March 2021.



Another big move in last month's report had to do with capex. While 'actual changes to capex' was flat on the month, credit availability rose another point to continue its massive improvement from the past few months.



Perhaps as a result of that greater ease for credit or perhaps to front run any potential tariff impact on the heavily exposed auto industry, we would also note that February saw a historic surge in the percentage of firms reporting capex spend on vehicles.

 

4th Worst Post Inaugural S&P 500 Performance since WWII



President Trump’s fast and furious pace of change to kick off his second term has created a great deal of uncertainty. Historically, the market has not performed well during periods of uncertainty. Monday, March 10, marked the seven weeks since Inauguration Day and as of the close S&P 500 was down 6.37%, its fourth worst post inaugural performance since 1945. Presidents Obama (2009), W. Bush (2001) and Ford (1974) suffered greater declines through the seventh week.

In the above table we have included the S&P 500’s performance every Inauguration Day since April 12, 1945, when Truman became President following the death of FDR. We also included November 1963, when Johnson took over after JFK was assassinated and Ford in August 1974, following Nixon’s resignation. We use the close on Inauguration Day or the day before when it landed on a holiday like this year. Republican Administrations are shaded in grey.

Seven weeks may be an odd data point to consider but it is consistent with the current time frame. Looking out to 12-Weeks After and 100-Days After, we see an improvement in S&P 500 performance with average, median and frequency of gains improving. Should the market find support, a rebound would be consistent with past post inaugural performance.

 

The Lag 7
Wed, Mar 19, 2025

Stocks are higher today ahead of the FOMC's interest rate announcement, Summary of Economic Projections (SEP), and the Powell press conference. Gains are good, but the S&P 500 is still down 8.1% from its 52-week high in February. While a decline of 8% sounds relatively modest, individual stocks in the index, especially the ten largest, have seen much larger declines. The chart below shows how far each of the ten largest stocks in the S&P 500 were trading from their closing 52-week high as of this morning. Of the ten, nine have seen pullbacks of at least 10%, and six of those have shed a fifth of their value. That's a bear market! The only stock bucking the trend has been Berkshire Hathaway (BRK/b), which was trading at 52-week highs this morning. When stocks representing more than a third of the entire S&P 500 are down a median of more than 20% from their respective 52-week highs, you can understand why some investors have been feeling more pain in their portfolios than the decline in the S&P 500 would suggest.



Of the ten largest stocks in the S&P 500, most still have rising 200-day moving averages (DMA), which would suggest their longer-term uptrends remain intact. The two exceptions are Microsoft (MSFT) and Alphabet (GOOGL). Both stocks have just recently seen their 200-DMA peak and start to roll over in the last few weeks.





Along with MSFT and GOOGL, Nvidia (NVDA) and Tesla (TSLA) are two stocks among the top ten where the 200-DMA is still rising, but it's coming really close to rolling over. Unless these stocks see a pretty big bounce in the days and weeks ahead, a rollover in their respective 200-DMAs is inevitable. That doesn't mean the stocks will continue to decline, but if the 200-DMA tends to act as resistance and it's also falling in the process, it doesn't present a good technical setup.

 

End of Q1 – Prone to Volatility and Weakness since 1990

Over the past 35 years the DJIA has declined 22 times and advanced 13 with an average loss of 0.62% near the end of March. S&P 500 has a similar track record. Excluding advancing years, the average decline is right around 1.5% for DJIA and S&P 500. End-of-quarter portfolio restructuring likely plays a role as managers lock in any gains and look to establish positions for the next quarter. These declines can begin on either the fourth-to-last trading day or the third.

Market weakness dominated the end of March from 1990 through 2009. From 2010 to 2017/2018 DJIA and S&P 500 largely bucked the previous trend and improved the recent 21-year trend in March. More recently late-March selling appears to be staging a comeback.

As of the market’s close yesterday (March 20), DJIA and S&P 500 were down 4.3% and 4.9% respectively this March. Historically end-of-Q1 weakness has occurred regardless of how strong or weak the month had been. In 2009 DJIA was up 12.20% and still declined 3.98% over the last three trading days. DJIA was down 11.24% in 2020 and lost another 2.82% at month’s end.

 

7 Policy Mistakes That Could Undermine Our Bullish Policy Outlook Updated


“If pro is the opposite of con, does that make progress the opposite of Congress?” -famous quip

Back on January 3rd, to mark the swearing in of the 119th Congress, we shared seven risks to our bullish policy outlook. That was still 17 days before inauguration day. Now we’ve seen the new administration’s policies gel for a little over two months and we’ve learned a lot since then, so we thought it was time for an update.

Two quick items for context before we dive in. Keep in mind that our sole focus when discussing policy is its impact on markets. Markets aren’t the arbiter of good and bad policy, and our aim isn’t to evaluate policy broadly. In fact, if we tried to that, we think we would do our job less well. Letting politics influence investing decisions rarely goes well.

Second, while we’re focusing on policy risks here, we do think there still are policy opportunities. In general, lower taxes, deregulation, higher fiscal deficits, and (although at risk) lower interest rates are all policies that tend to have a positive impact on corporate profits, which in turn supports stock gains. The sequence of policy (tariffs and DOGE first) has pushed opportunities back. But there are deadlines that mean there will be a major push for a large fiscal package by the end of the year. Most key provisions of the 2017 Tax Custs and Jobs Act (TCJA) expire at the end of 2025 (although not the lower corporate tax rate), confronting Congress with the prospect of a fiscal cliff with mid-terms less than a year away. While new legislation will be complex and narrow majorities in the House and Senate leave Republicans little room for error, the legislation can be passed under the “reconciliation” process, which does not require a filibuster-proof supermajority in the Senate.

Overall, the balance between risks and opportunities has shifted since January 3 with risks rising and some opportunities fading. We underestimated the depth of the Trump administration’s commitment to tariffs, but it’s important to keep in mind that final policy is still evolving. DOGE was an unforeseen risk, and while we have been impressed with the energy to reduce government bloat, the process has at times seemed reckless and not even entirely aligned with achieving its stated goal. But perhaps most of all, we think the opportunity to unleash “animal spirits” has been largely squandered, as judged by consumer sentiment, business sentiment, and the markets themselves. We did see a post-election surge in sentiment (and markets), but that has since largely evaporated. At the same time, the change in sentiment has had little to no impact on hard data yet, including earnings. Sentiment matters only if it shifts behavior.

The divide between hard and soft data isn’t new. The Biden administration was also faced with waves of negative sentiment as inflation reached generational highs in 2022, but real GDP has averaged 2.9% annualized over the last 10 quarters and 3.2% over the last four years. That compares favorably not only to the first Trump administration (2.8% excluding 2020 to take out the impact of the pandemic) but also the Obama administration (2.0%) and the eight years under George W. Bush (1.9%). Whatever you think of Joe Biden’s capacity to lead, the Biden administration has been the steward of the best economy since Bill Clinton, although that’s far from saying they were responsible for it.

On to the topic at hand. Here is our reevaluation of potential policy mistakes that could undermine our bullish policy outlook.

Risk 1: Tariffs Push Inflation Higher

Change since January 3rd: Higher Risk

Risk Assessment: High

Immediate Market Impact or Slow Burn?: Immediate Market Impact

Tariffs are coming, but as we’ve already seen, the specific policy can change overnight and we still don’t know exactly what the policy will be so we still need to take a wait-and-see approach. Just take tariffs on Mexico and Canada. On January 20, (inauguration day) the president said tariffs would be implemented on February 1. Then it became February 4. Then they were delayed by another month. Then later another month to April 2, but the president then reversed course and said March 4. On March 3, Commerce Secretary Harold Lutnick said it’s possible the tariffs won’t go into effect, but the president then said they would that same day. Tariffs provisionally went into effect March 4 but were then delayed on March 6 to April 2. Have you followed all that? And that’s just Mexico and Canada.

Thus far, tariffs on China have been raised to 20%; a 25% tariff has been implemented on all steel and aluminum imports; the 25% tariff on Mexico and Canada right now is still scheduled to go into effect on April 2; and nebulously defined “reciprocal tariffs” are also supposed to go into effect April 2.

We know already that markets are sensitive to tariff news, as it was the main driver behind the February 19 – March 13 S&P 500 Index correction, although we’ve seen a nice rebound since. We also know that the policy uncertainty created by tariffs is having an impact on Federal Reserve policy and businesses.



At the same time, the lack of clarity on tariffs makes it hard to gauge the longer-term impact. We have seen increases in both actual measures of inflation and business and consumer inflation surveys. We’ve also seen a rise in imports (which is a negative in GDP calculations) as importers try to get ahead of tariffs (which has contributed to higher prices), but that particular negative impact is likely to unwind. It’s also important to keep in mind that tariffs have a one-time impact on price levels but do not directly contribute to prices continuing to climb higher, and in that sense don’t contribute to inflation. (Although we also know consumers are sensitive to price levels too.)

Overall, tariff policy remains a meaningful risk and more significant than we originally expected.



Risk 2: The Federal Reserve Keeps Policy Too Tight

Change since January 3rd: Higher Risk

Risk Assessment: High

Immediate Market Impact or Slow Burn?: Immediate Market Impact


This one is intimately tied to tariff uncertainty, which has handcuffed the Federal Reserve. The current median forecast by the Fed is for two rate cuts in 2025 while the market-implied expectation is just shy of 2.5. For an in depth look at last weeks Fed meeting see Carson’s VP, Global Macro Strategist Sonu Varghese’s excellent analysis in “The Fed Is Stuck Waiting, and That’s a Problem.” There was some market upside from the last meeting, but only in that the Fed raised their inflation expectations without lowering the expected number of rate cuts. At the same time, the Fed is not in a hurry to cut amid a lot of uncertainty, and that creates on-going stress that could weigh on growth for cyclical areas of the economy.

Remember, a fed funds rate target of just 2.25 – 2.50% nearly broke the economy in 2018 – 2019, something President Trump correctly pointed out at the time, and low rates, even after some tightening, were still a major tailwind. Well, right now the target fed funds rate target is 4.25 – 4.50%, two full percentage point higher. The economy has been incredibly resilient despite high rates, but cyclical sectors, including housing, small businesses, and manufacturing, have been under pressure and the labor market, while still strong, has exhibited some underlying risk, although it remains stable for now. Productivity growth, which is supported by a tight labor market and has been an important contributor to recent growth and may also be damaged by policy that is too tight if it leads to a rise in layoffs.

We think the current expected slower path of rate cuts is very unlikely to push the economy into a recession on its own, but it will make the economy more sensitive to other shocks.

Risk 3: Unpredictability Restrains Animal Spirits

Change since January 3rd: Higher Risk

Risk Assessment: High

Immediate Market Impact or Slow Burn?: Immediate Market Impact


Unpredictability is part of Trump’s MO and he is capable of deploying it very effectively. But while unpredictability can be powerful when negotiating, it can create a difficult environment for businesses. We’ve already seen this come through in increased mentions of tariffs in earnings reports and surveys such as CNBC’s surveys of business CFOs. Companies put a lot of capital at risk based on expectations of future profits, and generally want policy clarity. Businesses also do not want a president who interferes with capital markets in a fit of pique. An uncertain policy environment can make it harder to do business, although sometimes it does also present opportunities. Initially viewed as a small risk, it’s clear uncertainty around some policies has weighed on business sentiment. Every policy environment has its element of unpredictability. But with the last Trump administration, for example, we did see tariff policy uncertainty weighed heavily on business investment in 2018-2019 and put a dent in the expected supply-side impact of the Tax Cuts and Jobs Act. The Fed has cited four areas of policy uncertainty weighing on its outlook, trade, immigration, fiscal policy, and regulation. Businesses are facing similar challenges. Some of these (fiscal policy, regulation) continue to have likely eventual upside for businesses, but the uncertainty still makes it hard to do business.

Note that policy uncertainty is often not a negative for markets because markets tend to be forward looking and high or peak uncertainty could occur near market lows. But the uncertainty represented here is more focused on the ongoing impact on the ability to do business that has not fully taken hold rather than the broad sense of uncertainty that has already led to economic disruption. September 2008 or March 2020, other times when uncertainty has been high according to a measure shared by the Fed, aren’t really analogous to the current situation. Where it may be somewhat analogous is that policy uncertainty is so high right now that the actual impact as unlikely to be as bad as expected.




*NEW*

Risk 4: DOGE Inadvertently Breaks Something

Change since January 3rd: Higher Risk

Risk Assessment: Moderate

Immediate Market Impact or Slow Burn?: Slow Burn

From a market perspective, it’s hard to gauge the economic impact (and eventual market impact) of DOGE. While some cuts have been dramatic, given the scale of an entire economy it’s really the knock-on effects that would cause a true economic disruption. There are areas of the economy that are more vulnerable, for example the Washington, DC area and industries that rely most heavily on research grants (e.g. medical research). There’s also some risk, for example, of challenges in the disbursement of Social Security or other disruptions to the smooth functioning of government that can have an impact on people’s lives, but again that’s unlikely to matter a lot compared to the scale of the entire economy. Really, in itself the political risk is larger than the policy risk. But the aggressive cuts do introduce “known unknowns” that require some caution and add to the general environment of policy uncertainty.


Risk 5: Internal Division within the Republican Party Delays or Limits Policy Implementation

Change since January 3rd: Unchanged

Risk Assessment: Moderate

Immediate Market Impact or Slow Burn?: Immediate Potential Impact but Not Until Later

This is a policy risk that has a positive side. We noted during the election that markets tend to like mixed government. The spirit of compromise tends to get us better policy and helps avoid the ideological excesses of both parties. But we won’t have mixed government in 2025 and ideological excesses are making themselves felt.

However, the majorities in Congress are narrow. Republicans hold a 53-47 majority in the Senate, as well as the tie-breaking vote by Vice President Vance. Republicans currently have a 218 – 213 majority in the House with four seats vacant, two formerly held by Republicans and two formerly held by Democrats.

While we did not get divided government in November, there are some ways in which narrow majorities keep at least some of the spirit of divided government. Republicans will need their own moderates AND their most hardline conservatives to vote yes to pass policy. There could be a cushion should Freedom Caucus members hold up a bill, since some Democrats could be pulled on board to support a bill if they believe it is in their interest, but it would require some compromise.

Narrow majorities keep more checks and balances in place, but they also increase the possibility of legislative chaos and will make it more difficult to pass any bill that doesn’t have broad consensus among Republicans. Significant delays that disappoint policy expectations could lead markets to become impatient with Congressional infighting. The key date here is the end of the year deadline when major provisions of the TCJA sunset. Republicans are also well aware that the president’s party has lost House seats in mid-term years in 20 of 22 mid-term elections since 1938.

Risk 6: Immigration Policy Stunts Economic Growth

Change Since January 3: Unchanged

Risk Assessment: Moderate

Immediate Market Impact or Slow Burn?: Very Slow Burn

In my view, this is the most underrated risk but still secondary to those listed above it when it comes to the absolute level of risk. Clearly there are some genuine problems with current immigration policy. But the extent to which the resilience of the US economy depends on its ability to attract and absorb global labor is often underestimated. In fact, I would say the two key factors that have led to the structural advantage the US has over other developed economies is a more business-friendly overall policy environment, including labor market flexibility, and its history of acting as a destination of choice for immigrants.

It’s hard to determine the level at which tighter immigration policy becomes a genuine risk, and before it becomes a risk there certainly may be areas where reforms would provide benefits. The aim here is not to determine what the right immigration policy should be, but just to highlight that at some point tight policy can start to impact the economy and markets.

Thus far, the rate of deportations seems to have accelerated only modestly from the Biden administration, although the Trump administration has raised the media profile of deportations and some disputes in the courts have received a lot of attention. However, the numbers are difficult to gauge because the Trump administration has ended the regular reporting on deportations by ICE and the Department of Homeland Security.

However, net immigrant in-flows have fallen dramatically according to estimates from Goldman Sachs, from an annualized pace of 1.7 million to 0.7 million based on data from December and February. That will have an impact on job growth, but it will also lower the job growth needed to keep the unemployment rate steady because immigrants also contribute to unemployment. But even with a steady unemployment rate, fewer jobs added will mean slower aggregate income growth, which is the primary driver of US economic growth.

Here are just a few of the reasons immigration policy could pose a risk from an economic perspective:

-If the current level of flow of earners falls due to immigration policy and the chilling effect on new immigration, there’s a direct impact on GDP. A dollar of lost income is a dollar of lost GDP. Policy that leads working immigrants to leave the US, or choose not to come in the first place, is the economic equivalent of exporting U.S. GDP growth to the rest of the world.

-There is a steep implicit regulatory burden on business from tight immigration policy, both by restricting their access to workers and making the cost of labor higher. Elon Musk’s and Vivek Ramaswamy’s initial support for expanding H-1B1 visas due to their contributions to US technology leadership was poorly received in some MAGA circles.

-A more restricted labor pool also has the potential to drive wages higher, posing some additional risk for inflation. This effect may be stronger with the prime age participation rate already near a record high. We think this risk is fairly small, but not non-existent.

Immigration reform is a positive goal, but also comes with some risks. How high those risks are depends on actual policy. It would take a fairly large mistake to have enough of an impact on the economy to weigh on markets, but the potential for a large mistake is non-trivial.

Risk 7: Fed Independence

Change Since January 3: Unchanged

Risk Assessment: Low

Immediate Market Impact or Slow Burn?: Immediate if it were to occur

I would consider this a very small risk, but with the consequences of a misstep potentially large. Trump has already put some pressure on the Federal Reserve to lower rates, although I would say he’s been fairly restrained. Comments on Fed policy in and of itself aren’t a problem. There are mechanisms that help maintain Fed independence. But if there is an effort to overstep or to appoint a loyal and partisan Fed chair when Jerome Powell (himself a Trump appointee) steps down in May 2026, markets will respond. This one is unlikely to be a slow burn. If Trump oversteps, I would expect the market response to be unmistakable. If Trump floats test balloons that cause market jitters but can easily be stepped back, it’s not an issue. But a genuine threat to Fed independence that cannot be walked back could be a problem. This may also arise through efforts to call into question the constitutionality of independent agencies, which is a potential stepping stone to removing Fed independence.

Interestingly, Fed policy (although not necessarily Fed independence) is a place where Trump’s inclination (lower rates) is most directly in conflict with Project 2025, which wanted more emphasis on the inflation side of the Fed’s dual mandate and in fact recommended removing the “maximum employment” mandate altogether. There are other areas where they are more aligned, including potentially limiting Fed independence, but I would characterize Project 2025 as generally hawkish on Fed policy while Trump is quite dovish, especially when he’s in office.

*to be removed*

Risk 8: Deregulation Clashes with the Supreme Court’s Chevron Reversal

Change Since January 3: Lower

Risk Assessment: Low

Immediate Market Impact or Slow Burn?: Very Slow Burn

If I kept this one, I would expand it to slowing policy implementation more generally. But even this I don’t see as a risk directly to markets. Trump has been testing policy limits so actively that the courts have been busy, and making the implications of Chevron central in that context was short sighted. Still, the net effect of policy working its way through the courts typically has little to no immediate market impact, since it’s part of the normal functioning of the federal judiciary to take up these kinds of questions. There are some potential issues that could be market moving if they found their way up to the Supreme Court (for example Fed independence or election-related decisions). But outside of that or a genuine constitutional crisis, I doubt what happens in the courts will have a direct takeaway for markets. Should we review all these policy risks again in the future, this one is coming out.

There you have it, seven policy risks that we’ll be watching for in 2025, with tariff unpredictability and the Fed’s rate decisions still the most meaningful, but a few others to keep an eye on as well. Our view on policy and “animal spirits” in our Outlook 2025 was that there was the potential for there to be an added tailwind from animal spirits, but our overall view was not dependent on it. The opportunity for the potential tailwind has not been entirely lost, depending what happens with the tax bill, but it hangs by a thread and disruptions have been larger than expected. We have informally downgraded our GDP expectations with the potential upside we saw likely off the table. We are probably looking right now at something more like 2% GDP with risks more to the downside (but not recessionary) for 2025 versus something more like 2.5% with risks to the upside when we made our initial assessment. But we will continue to monitor both risks and opportunities for how they are playing out.

 

Down Q1 Can Lead to More Trouble

This is no April Fool’s joke. Adding to our concerns that the market in 2025 continues to track less bullish post-election year scenarios is the history of market performance following down first quarters, especially in post-election years. First the good news. April has been up on average and about 63% of the time. Q4 has been even stronger. Though both April and Q4 have taken some hits as well.

But unfortunately, Q2 and Q3 have been weak overall and Q3 especially in post-election years. Most compelling is that if the market had already achieved bear market levels when Q1 was down it was usually near a bottom or low point from which the market rallied substantially. Conversely, if Q1 is negative and the market has not reached bear market status or is not far from a recent all-time high, then we have more often than not experienced further market trouble and downside action over the subsequent nine months.

Several of the weak republican post-election years discussed on page 28 of the 2025 Almanac also standout: 1953, 1957, 1969, 1973, 1981 as well as 1977, Jimmy Carter’s difficult first year. There are several other non-post-election years of concern, most recently 2022. The most impressive turnarounds from down Q1s occurred at or near the ends of bear markets in 1980, 1982, 2003, 2009 and 2020 after Covid-19 induced the shortest bear market on record.

 

Post-Election Year Woes Persist

There’s no way to sugarcoat it, unless the market can get back into the green for the year in April, our more bullish base case scenario for 8-12% gains for 2025 becomes harder to achieve. Currently, the S&P 500 is tracking the weaker post-election patterns of republican administrations and after incumbent party losses. This action has increased the odds of our annual forecast worst case scenario.

2025 is tracking the old school weak republican president post-election year performance noted on page 28, Stock Trader’s Almanac 2025. The market is concerned Trump 2.0 and Congress may be implementing too many drastic measures, which tends to lead to flat to negative full-year performance. Unless the market can rebound substantially next month, we are likely in store for some tough sledding through the third quarter.

 

Rollercoaster
Mon, Apr 7, 2025

Late last week and over the weekend, there were multiple predictions calling for more volatility. For instance, CNBC's Jim Cramer drew parallels with "Black Monday". Most investors probably haven't even had lunch yet, but already it's looking like a session for the history books. As we noted in a post on X, there have already been multiple mid-single-digit swings in both directions. As shown below, with the declines the S&P 500 (SPY) briefly dipped into bear market territory which we discussed the implications of in last Friday's Bespoke Report.



Again, it's not even noon but the opening move in addition to the declines last week has been enough to earn accolades. For starters, SPY has now had negative downside gaps (open lower than the prior day's close) nine sessions in a row. Since SPY began trading in the early 1990s, there have only been four other such streaks. The most recent streaks were clustered around 2015 and 2016 while the other occurrence was way back in January 1995.



Not only has there been such consistency to the downside at the open, but the moves have been very large. For four straight sessions now, SPY has gapped down at least 1% which is a new record. Within that streak was a 1.05% decline last Wednesday, a 3.4% drop Thursday, a 2.4% decline Friday, and a 3.2% decline today. The only other streaks of 1% gaps down that even lasted for three days occurred in September and December 2008 and later in March 2020.



As noted earlier, there have already been some wild swings intraday. As a result, the intraday trading range has blown out to epic proportions, and again, it's not even lunchtime. As shown below, today's intraday high-low spread for SPY has been 8.58%. In the ETF's entire history, there have only been 20 other trading days with as wide of a range. The most recent of these before today was during the COVID Crash. The China currency devaluation in August 2015 was another relatively recent example of a huge intraday range although it wasn't quite as big as today, and before that, there were multiple instances around the time of the Great Recession, July 2002, August 1998, and October 1997.