A Flexible Market
Bigger than a new fighter jet... Liberation Day is coming... Hints of 'flexibility'... Signs of a bottom... The most expensive sport in America... Thinking around the next corner...
The 'trade war' taketh and giveth...
The major story today, splashed across the mainstream financial media this morning, was the idea of "flexibility" on tariffs...
On Friday afternoon, President Donald Trump sat in the Oval Office and in response to a reporter's question about his tariff strategy, he defended delaying some import taxes a few weeks ago that would directly impact U.S. automakers. Trump said...
I gave the American car companies a break because it would have been unfair if I didn't. And everybody said, "He changed his mind on tariffs." I didn't change my mind... I helped some of the American companies...
I don't change, but the word "flexibility" is an important word. Sometimes there's flexibility, so there'll be flexibility.
Then, over the weekend, the Wall Street Journal and Bloomberg reported that various additional tariff exceptions could be made on or by April 2. That's the date Trump has described as "Liberation Day," meaning when blanket reciprocal tariffs on presumably every nation were to go into effect.
On these rumors, Mr. Market's ears perked up...
The benchmark S&P 500 Index, tech-heavy Nasdaq Composite Index, and Dow Jones Industrial Average moved higher on Friday afternoon, and all the major U.S. indexes closed at least 1.5% higher today. The Nasdaq and small-cap Russell 2000 Index led, gaining 2.1% and 2.5%, respectively.
Friday's White House media availability was supposed to be about the Defense Department's plans for a sixth-generation fighter jet, the F-47, which Boeing (BA) won the bid to manufacture.
But for the investing crowd, the word "flexibility" was much bigger than a new fighter jet.
Now, it's hard to say precisely what tariff flexibility will look like... in part because I (Corey McLaughlin) doubt anybody but Trump and a few other people will know what it looks like until it happens. So, uncertainty will continue to play a role.
Still, Trump's words were taken as a signal of potential softening on tariffs that could most hurt U.S. businesses. The scope of this trade war may also be becoming clearer to more people. A key point is that foreign nations on the Trump side of immigration policy are more likely to get a break than those that aren't.
Today, for example, Trump posted on social media that any country that buys oil or gas from Venezuela "will be forced to pay a Tariff of 25% to the United States on any Trade they do with our Country," starting on April 2.
That's because Venezuela has "purposefully and deceitfully sent to the United States, undercover, tens of thousands of high level, and other, criminals," including members of the Tren de Aragua gang, Trump said.
Many countries, including the U.S. and primarily China, buy Venezuelan oil... But the markets showed less interest in this tariff threat than Trump's other direct import taxes on goods and services from Canada, Mexico, the European Union, and China.
Of the S&P 500, 425 stocks were higher today. So were 10 of the 11 major sectors, led by consumer discretionary stocks (up 3.5%). That's something you typically see in a "risk on" environment.
Bitcoin surged by roughly 4% in the past 24 hours to above $88,000 and is up about 14% from a low on March 11.
Could the negative tide to the start of 2025 be turning? As we'll explain today, perhaps... And it's in part because of possible "flexibility" on factors that have scared many investors over the past two months.
The market didn't even mind one bearish indicator today...
The latest S&P Global Manufacturing Purchasing Managers' Index ("PMI") came in at 49.8 for the current month. Anything below 50 in this leading indicator of U.S. manufacturing activity is a sign of economic "contraction," or recession. This number was close to 53 in February, so it shows a slowdown in activity, though not consecutive recessionary months.
According to S&P Global, higher prices (most prominently tied to tariff concerns) are an issue...
Cost pressures intensified across the economy in March. Across both goods and services, input costs increased at the sharpest rate for 23 months, surging especially in manufacturing (where the rate of inflation hit a 31-month high) but also picking up further pace (to an 18-month high) in the service sector. Higher costs were first and foremost attributed to tariffs, though increased staffing costs were also widely reported.
At the same time, as we've noted in recent months, consumer confidence is souring. Lower- and middle-income Americans are carrying heavy debt loads and encountering discouraging higher prices. We'll have some more on the state of consumer confidence tomorrow.
The better news is that these troubling economic data points and surveys of folks and businesses are backward looking. On the other hand, today's market movement reflects ideas and expectations about the future. On that front, things may be turning around.
Signs of a bottom, but be careful 'fishing' just yet...
The CBOE Volatility Index, or "VIX" – considered by some to be the market's fear gauge – dropped by almost 9% today alone to a reading close to 17. That's down from 28 just two weeks ago.
Some parts of the market may have bottomed or are in the process of doing so. Our Ten Stock Trader editor Greg Diamond has been mentioning this lately, including in last Monday's Digest, where he highlighted the semiconductor sector as an indicator.
Greg has continued tracking things for his paid subscribers, writing this morning...
Things are shaping up exactly as I anticipated.
That means late March is still likely to mark an important low in the market. However, as I'll discuss, we may need to be a bit more patient with the timeline.
He went on to update folks on the behavior of semiconductors within his technical time and price indicators. Here's a critical note, though: While the sector has turned higher lately, one more leg down could still occur before it hits a near-term bottom. In other words, be careful...
I'm reminded that our friend Marc Chaikin, founder of our corporate affiliate Chaikin Analytics, likes to say that "bottom fishing is the most expensive sport in America." (By the way, don't forget about Marc's upcoming free presentation on Thursday about how he suggests navigating this volatile market right now.)
Greg says he's weighing two options: Is this latest move down complete, with a "breakout" coming next... or "will we get one more drop, based on the fear around inflation numbers, the [Federal Reserve], or tariffs?"
So, be careful "bottom fishing," at least for now. Bad news could upset sentiment further. But it's time to consider things turning around. Ten Stock Trader subscribers and Stansberry Alliance members can find all the details in Greg's Weekly Market Outlook and have access to his specific trade recommendations.
If you can think around the next corner...
I know it might not be a popular thing to say when it seems like the market is saying everything's going wrong – by that, meaning the S&P 500 was recently down 10% from its all-time high, marking a formal correction.
But if you're really into this investing game for the long term, these are the kinds of moments you should love. It may be a great time to be patient and not panic... or even to scour your "shopping list" for buying opportunities of great stocks at more attractive valuations.
Beyond the technical indicators Greg is tracking, certain sentiment signals suggest at least an environment where we would expect selling pressure to ease. For example, we're seeing extreme levels of investor pessimism today.
As Nick Koziol wrote last week in Tuesday's Digest...
For starters, the American Association of Individual Investors survey (which asks its roughly 150,000 members whether they're bullish, neutral, or bearish on stocks) shows that investors are extremely pessimistic about stocks today. Around 60% of respondents said they're bearish on stocks over the next six months. That's one of the most pessimistic readings on record.
Professional money managers are acting scared, too...
Bank of America's survey of money managers, of whom have a combined $426 billion in assets under management, shows investors are raising cash and leaving stocks.
In March, fund managers raised their cash levels to 4.1%, from 3.5% in February. It was the largest cash raise in the survey since March 2020, when COVID-19 pandemic fear was at its peak.
While things like this may sound dire on the surface, if you can look just a little bit around the next corner, it means folks have less room to get even more negative than they already are – at least about tariff fears that have been making headlines for a few months.
Last seen in the bottom of 2023...
Our colleague and DailyWealth Trader editor Chris Igou wrote to subscribers about this today, noting that the S&P 500 recently hit its most "oversold" level since a notable bottom in October 2023.
After writing last week about a "strong breadth signal" that suggested double-digit upside in U.S. stocks ahead, he wrote today that this recent oversold reading is another "signal for the bulls"...
When a market moves too far, too fast in either direction, this indicator flashes a signal. If the move is to the upside, rising above [a relative strength index ("RSI") level] of 70, it flashes a warning signal. The rally is "overbought," and a pullback is likely in the following days or weeks.
But when the asset falls too quickly, dropping below an RSI of 30, it tells us the move is overdone to the downside. This "oversold" reading typically happens before a rebound takes place.
In the chart below, you can see the S&P 500 dipped below an RSI of 30 this month...
We haven't seen this kind of selling extreme in the U.S. benchmark index in more than a year. And last time around, as Chris noted, it rallied 38% over the next year...
That is a massive win for a market that averages 8.8% a year (not including dividends) since 1980. While not all oversold cases lead to gains like that, they do tend to lead the index to outperform a basic buy-and-hold strategy.
Since 1980, similar cases have led to a winning trade 76% of the time over the next year. And the returns are strong in each period we tested...
Buying after an oversold signal has led to gains of 3.9% in three months, 6.3% in six months, and 12.1% over the next year.
We already noted that the one-year time frame has a win rate of 76%. And the six-month period isn't bad either, with a win rate of 72%.
In short, we can't guarantee that this correction won't turn into a bear market. But we continue to find evidence that the likely case is for a new bull run.
Putting this all together, any "good news" on the points that have frightened investors in the past two months – like tariffs – could be a tailwind moving ahead for stocks. Not all of them, perhaps... though today was pretty close.
New 52-week highs (as of 3/21/25): Alpha Architect 1-3 Month Box Fund (BOXX), Franco-Nevada (FNV), Royal Gold (RGLD), VeriSign (VRSN), and Vanguard Short-Term Inflation-Protected Securities (VTIP).
In today's mailbag, some replies to Dan Ferris' Friday essay and his question about whether Trump's trade war is a "3D chess move"... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.
"Tariffs are a chess game to Trump. He used them effectively [in his first term]. There was none of the disasters, including inflation, that was predicted by left-wing hacks that pass themselves off as economists. This time will be no different. If this is a trade war, we are merely returning fire after taking incoming for decades. Trump does not want a trade war and he realizes (as you should) that everybody knows who would win such a war. We hold the cards. But it does not matter how strong your hand is unless you play it..." – Subscriber Richard L.
"Dan, I think your comments regarding tariffs are correct in the context of the market as a whole, but less so when considering the situation in the US.
"Really bad policy has moved much of our manufacturing base overseas and transformed the US into a bunch of consumers financing their lifestyles with credit. This has led to a massive transfer of wealth out of the US through growing trade deficits and the destruction of our blue-collar working class through unemployment, lower wages and higher cost of living. That has led to increased deaths from substance abuse and suicide, which has resulted in an 8-year gap in avg life expectancy compared to their white-collar counterparts. The loss of manufacturing jobs has also led to dependence on foreign suppliers for medical and other critical supplies.
"The decisions to offshore to lower cost manufacturers made a lot of economic sense because lower prices and greater profits are always good for everyone. But what happens when you do this on a large scale in the country with the highest standard of living middle class in the world? The predictable outcome happened. Much of the middle-class jobs were manufacturing and they went away. And the suggestion that those workers would just move to other equal or higher paying jobs was a joke. The reality is that much of that group went on various forms of public assistance and tried to survive and support their families on whatever they had saved and what debt they could accumulate. This has resulted in the largest wealth gap in our nation's history...
"As far as referring to this as a trade war, that's kind of missing the point. First of all, we are the biggest consumer market in the world, so other countries can't really fight us tit for tat. The reality is that large companies will make the smart, economic decisions, which will result in a tremendous amount of manufacturing moving back to the US.
"It may not all be smooth sailing, but I know it will make our country stronger in the end. I'm just happy that we finally have a major political party doing the right thing for the American people instead of for themselves. If you don't believe that about Trump, you've really missed the story." – Subscriber Brad L.
"Dan, I liked your March 21 essay on second level thinking and agree with you that it's very hard to apply successfully in practice. A number of years ago, a friend and I performed a tongue-in-cheek experiment in using second level thinking to try to beat the house odds at the Craps table. If we liked the way a particular dice shooter looked, first-order thinking would dictate most players, including us, to bet that he would roll his point. Alternatively, if we didn't like the way a shooter looked, first-level thinkers like us would normally bet against him. Since this betting system caused us to lose money in the long run, we reasoned that if we used second level thinking to bet contrarily so that we always bet the opposite of how we initially felt like betting, then we should win in the long run. Sad to say, our second level thinking only caused us more losses. Where was the error in our logic?" – Stansberry Alliance member Jim H.
Corey McLaughlin comment: I'd point you back to something Dan wrote in Friday's essay...
Second-level thinking is an excellent lens through which to understand what makes a good contrarian. A good contrarian doesn't simply do the opposite of what everyone else does. I'd call that "knee-jerk contrarianism."
A good contrarian understands investments and markets at a deeper level and can find attractive opportunities in places others don't even look. He goes against the consensus, but in a way that requires the deeper, more complex, and more convoluted thinking [Howard] Marks says is essential to outperform the average investor.
All the best,
Corey McLaughlin
Baltimore, Maryland
March 24, 2025