March 17th, 2025 - From boom to bust, in 60 days.

copyright: Carl Godfrey/Financial Times

It has been almost 60 days since President Trump took office. The very next day the stock market started correcting, only to recover at the end of February to almost the same level as on January 24. A few months ago US stocks were propelled by the market's confidence that Trump will back down from policies that could harm economic growth and hurt the stock market, but rather he would stick to the "good" ones. Fast forward to today and that investor confidence has been shattered, together with consumer and business confidence. The February postponement of the Canada/Mexico tariffs until the beginning of March was erroneously taken by the markets as a sign that Trump uses them purely as a negotiating tactic. But the reality was much different. Not only did he implement big tariffs on Canada, Mexico, China and the EU, sparking a trade war, but he is changing his mind publicly every day, creating more uncertainty and volatility. Befriending Russia and alleniating himself from long-standing allies (Canada, EU, Australia) has created a mass exodus from US financial assets, including the dollar. Investors are now questioning the US exceptionalism.

A new market consensus is being formed. The US supremacy theme has been dealt significant blows under the Trump administration and investors are reducing their US exposure in favor of other markets. According to UBS analysts, the foreign ownership of US equities is estimated at $18-20 trillion or 30% of the US market. Even if investors decide to cut their US exposure by just 5%, the selling volume would total $1trn and this excludes money from US investors who might be thinking of diversifying away from the US. This potential $1trn ‘sell order’ may be absorbed by corporate buybacks and pension fund demand in the US over a short period of time. But this 1trn $ would be a huge amount of money if it flows into other smaller markets, such as Europe and China, which would result in significant price appreciation there. Whether this materializes is anybody's guess, but the seeds for the rotation out of the US have been sown, by their President.

We have quickly moved from pricing a very optimistic "animal spirits" scenario to the other extreme of a potential recession hitting the US economy as soon as this quarter. When President Trump was elected, small business sentiment measured by the NFIB posted the largest one month jump in the survey's history. In just four months the small capitalization companies stock index, Russell 2000, has fallen more than 20%, at valuation levels that now discount a 50% probability of a recession, according to analysts. The rally in long-term bonds, despite the spike in inflation expectations, also points to the market increasingly being worried about a severe economic slowdown. But worst of all was Trump's public admission that there will be pain in the short term, declining to rule out a recession, which means that the current 10% drop in the S&P500 is not even close to the pain threshold that will make him change his mind. US equities typically drop closer to 30% during a lasting recession.

Consumer and business confidence has been shaken, according to most available data. The University of Michigan consumer sentiment index fell to 57.9 in March, the lowest reading since November 2022! Meanwhile the 5-10year inflation expectations rose to 3.9% from 3.5%, the highest since 1991, which points to an even worse economic scenario, that of stagflation. At the same time several US companies in the airline industry (Delta, American Airlines), restaurants (Mc Donald's) and retailers (Target, Costco, Kohl's ) recently warned that during February they have witnessed a meaningful slowdown in traffic and spending. As the Financial Times writes, "Footfall to US stores fell by 4.3 per cent year on year in early March, according to RetailNext, a consultancy, extending declines that began at the start of the year. Placer.ai which aggregates signals from consumers’ mobile devices, has recorded fewer visits to big-box stores including Walmart, Target and Best Buy in recent weeks". February's Retail Sales are due today and will be interesting to watch.

In Germany, on the other hand, things are moving into the right direction, with a large fiscal stimulus on its way. Following days of discussion, the CDU/CSU/SPD coalition offered some modifications that should ensure a more targeted spending of the funds and reserve a larger share for green projects (about 100bn EUR), in order to win the Greens' votes. The deadline for passing the constitutional amendments is 24th March as the new Bundestag will convene for the first time on 25 March. The debate in the Bundesrat (upper house), where a two-thirds majority is required as well, is planned for 21 March. In the Bundesrat, which comprises the governments at the state level, states governed solely by CDU/CSU, SPD or Greens do not have a two-thirds majority. Hence, states where the FDP or the Free Voters (Bavaria) are part of the government would have to convinced.

Equities had yet another rough week , with Europe outperforming again. Despite the strong rally on Friday, the S&P500 lost 2.1% for the week, and touched the 10% correction level, of which we had been talking about lately as the first support line. Nasdaq also lost 2%, although buyers emerged in beaten down semiconductors stocks and Tech-related companies on Thursday and Friday. Europe was down by 1% on average, but the German DAX managed to finish flat and is now 15% higher on a year-to-date basis. As a reference, the S&P500 is -4% in the same period and Nasdaq -8%, a huge performance differential that we struggle to remember when was the last time that this happened.

US inflation slowed in February and was better than expected, ahead of this week's FED meeting. The headline CPI increased 0.2% which is the slowest monthly change in many months and brought the annual change down to 2.8%. Core CPI , which excludes food and energy items, also fell more than expected to 3.1%. Looking into the details, the important OER item (owners' equivalent rent) rose "only" 0.28% in February, which confirms the recent trend of slower growth which is closer to the pre-pandemic level. Overall the data are considered positive, but would most probably not change the view that the FED will have to maintain interest rates at current levels, especially after Friday's inflation expectations' jump shown in the Michigan survey.

Bonds were rather stable and the recent highs in EUR yields have been met with buying interest. The 10yr Bund yield finished the week at 2.87%, very close to the multi-year high of 3%, registered in 2023 and the US equivalent is at 4.30%, down 50bp from its recent high. There were some signs of stress in the high yield market, with US yields jumping 70bp from the record low levels of the previous week. Although this is worrying, we had a similar phenomenon last August, during another recession scare, when incidentally the S&P500 also lost 10%, before rallying back to new highs. Hence so far so good.

Chart of the Week : Is the local Chinese market ready to fly ?.

As the world rotates out of the US and into Europe and Chinese Tech companies, the local chinese equities (A shares) seem to have been left behind. The large-cap Tech heavy Hang Seng index is almost 20% higher and the CSI300 (shown below) is just +2% , year-to-date. Taking a look at the below chart , we see the continuous fall of the index since the peak of 2021 until in 2024 we had the major technical positive development of a double bottom (green line). That level coincided with the government's decision to implement serious measures for the local economy and the real estate industry, which led to a relentless rally of almost 30% in a matter of days. Despite the break of the downtrend, the market has been drifting lower since that peak, until around mid-January, which coincides with Trump's inauguration... That level of support was the 50% Fibonacci retracement level (from the low to the peak of the rally) which is a very positive development. Since then, the market has moved higher, breaking back above its 50day moving average. There is increasing evidence and chatter from the ground that the government is now targeting to increase consumption, which of course benefits local companies, of small and medium size. The Chinese A-shares could be the next theme in markets, providing very positive returns for the remaining of the year.

Disclaimer

• The content of this document has been produced from publicly available information as well as from internal research and rigorous efforts have been made to verify the accuracy and reasonableness of the hypotheses used. Although unlikely, omissions or errors might however happen.

• The data included in this document are based on past performances and do not constitute an indicator or a guarantee of future performances. Performances are not constant over time and can be positive or negative.

• This document is intended for informational purposes only and should not be construed as an offer or solicitation for the purchase or sale of any financial instrument and it should not be considered as investment advice. The market valuations, views, and calculations contained herein are estimates only and are subject to change without notice. Any investment decision needs to be discussed with your advisor and cannot be based only on this document.

• This document is strictly confidential and should not be distributed further without the explicit consent of Kendra Securities House SA.

• Sources: Chart of the Week : KSH/Factset