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Friday’s market plunge capped off a bearish week and most likely the worst quarter seen since 2022. Tariffs are the news headline, and the Magnificent 7 are the biggest drag on the index price declines. This week, we’ll add the employment data to the list of big market concerns.

However, what should we, as active investors, focus on or, as some may view it, fear the most? What’s going to determine the depth of this market correction?

There are a lot of factors weighing on the market, but a primary driver has been “animal spirits.” We don’t hear that term now because, for some reason, it only gets used when investor sentiment is bullish. You may recall that “animal spirits” was considered a very real and primary driver of the market’s ascent to new highs after the Trump election.

Now, regardless of what you believe the long-run implications of the Trump tariff ideology will be, the impact over the last several months has been an increase in bearish sentiment about the future trends in inflation and growth. This bearish sentiment began with the consumer and has spread to small business owners.

The consumer and small businesses are two of the most important drivers of growth in the economy, so what has unfolded over the last few months is a market becoming increasingly representative of the bearish outlook for economic growth.

This week, the most important hard data on the employment trends will be released. All eyes will be watching out for any significant increase in unemployment trends. If the labor market weakens, the consumer will almost certainly become even more of a drag on economic growth.

Shortly after this week, companies will start reporting Q1 earnings. The earnings will likely take a back seat to the companies’ reporting on their outlook for the future and any insight they offer on the impact of the tariff policies.

For the active investor, the coming weeks will be filled with potential opportunities to identify the companies that are adapting to the new economic climate. The new administration has unleashed domestic policies, geopolitical trends, and economic forces that will continue to reshape the investment landscape.

There is a good chance that some of the leading trends of the last few years will give way to new market leaders.

Most of our investment models and many of our discretionary strategies focus on adapting to market rotations like the ones under way. If you’d like to discuss how to incorporate this into your investing process, contact us.

Friday Got Hit From All Sides

Friday, unfortunately, exemplified several of the bearish market forces hitting the market at the same time.

1. The IPO of CoreWeave (CRWV) represented the first pure-play AI IPO and counts the biggest companies spending on data centers as its customers. It’s hard to say whether its need to reduce the size of its offering at the last minute was a result of, or a contributor to, the very bearish day in the market, but it certainly was not bullish. Additionally, even with a small offering, its performance suggests tempered excitement around the AI trend.
2. Lululemon athletica Inc (LULU) tumbled on its earnings announcement and gave forward guidance that suggested a slowing in consumer demand.
3. The government reported one of the Fed’s favorite indicators, PCE, and it indicated higher inflation and slower growth than expected.

Perhaps the most telling result of Friday’s news flow was that the futures markets moved from an expectation of two interest rate cuts to almost three by year-end. In short, stocks got hammered on Friday on fears of slower economic growth and fears over corporate profits in an environment where inflation fears are still very real.

The Big Day

As the markets are confronted with and move beyond the announcements of April 2, “Liberation Day”, the key driver of market direction will likely be the expectation for future economic growth and corporate profits.

Whenever these factors are at the forefront of investors’ investment decisions, the likelihood of increased monetary stimulus from the Fed can become the prevailing market driver. When the expectations of the Fed’s policy drive market action, the market can trend in directions contrary to the headline news sentiment about the state of the economy and reverse course without warning.

If we are, in fact, heading into such a period in the markets, it’s essential to focus on effective risk management to minimize drawdowns and remain diligent in maintaining market exposure. The right investment approaches make more in their winning periods than they lose in their drawdowns, and you can’t maximize your winners without having market exposure.

Now, I'll hand things over to Keith.

Every week, we review the big picture of the market's technical condition as seen through the lens of our data charts. The bullets below provide a quick summary organized by conditions we see as being risk-on, risk-off, or neutral.

Summary

Markets sold off on Friday, erasing the gains seen earlier in the week. Most markets seem to be at a critical juncture. If they can hold onto the March 13 lows, it could resume a bounce; although a failure could accelerate the markets into a harder sell-off.

Risk-On

• The new high/new low ratio remained mostly positive.
• From a seasonality standpoint, markets will be entering a strong period over the next few weeks.

Neutral

• Markets were down between -1% and -2.5% for the week, led by the Nasdaq, as both the SPY and QQQ failed their attempts to reclaim their 200-day moving averages. Most of the weekly decline happened on Friday, though the early March lows have yet to be taken out.
• The charts are negative on the longer-term, but they are still neutral on the short- and intermediate-terms.
• Emerging and more established equities were down on the week, though less than U.S. markets, and both have been holding onto bullish phases with their rising 50- and 200-day moving averages.
• Copper broke out to new highs before mean-reverting into the close of the week, but the trend has remained intact.

Risk-Off

• Volume patterns were negative, with more distribution days than accumulation days over the last two weeks -- with the exception of the Nasdaq, which had the same number of both.
• The percentage of stocks above their key moving averages was stacked, sloped negatively, and not oversold.
• Sector performance was negative nearly across the board, with the only sectors positive on the week being traditional, risk-off ones like gold miners & consumer staples.
• The biggest winners on the week were commodities like gold and silver, while tech and semiconductors took the hardest hits.
• The McClellan Oscillator flipped back to negative territory by Friday's close, and it was not oversold.
• Cash volatility held its 200-Day Moving Average and bounced higher on Friday.
• Risk gauges deteriorated by Friday’s close as they flipped to fully negative.
• Value outperformed growth on this down move in the market, though both value and growth stocks are now under their 200-day moving averages.
• Gold hit new all-time highs, and it did not appear to be overbought on a price or real motion basis.
• A flight to safety was seen on Friday across all ends of the yield curve.

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