Federal Reserve Helps Stocks End Four-Week Losing Streak

Jeffrey Buchbinder (00:00):

<Silence> Hello everyone, and welcome to another LPL Market Signals Podcast. Jeff Buchbinder here, your host for this week with my friend and colleague, Dr. Jeffrey Roach. How are you today, sir?

Jeffrey Roach (00:11):

Hello. Hello. Glad to be back on the podcast with you.

Jeffrey Buchbinder (00:15):

Good to have you back, Jeff. Good to have you back. So one of the big events last week was the Fed. So I am glad you are here to help me make sense of that event, which on the surface didn't look like great news, but if you peel back the onion, as I like to say, it was actually a pretty good message and market friendly. So we'll talk about the Fed today. That's kind of the bulk of our comments that Jeff will take the lead on. And I'll do quick market recap and then we'll preview the week ahead, which is actually a very consumer heavy week, not just consumer spending, but consumer confidence and inflation as well. So let's get right to it. It's March 24, 2025 as we're recording this Monday afternoon. And we are looking at a really nice rally here.

Jeffrey Buchbinder (01:09):

So stocks broke a four-week losing streak last week, and we're off to a really good start so far this week. Although, of course that can change as we know tariff headlines can cause this market to go just about anywhere these days. So here is our performance table for last week S&P 500 up about a half a percent. The Dow and the Russell did a little better. The NASDAQ did a little bit worse. We had a little bit of a tough week again for big tech. So we had Nvidia down in particular down about 3%. So that certainly weighed a little bit on tech, which was an underperformer. The best performer last week was energy. So Jeff, I think, I mean, we can start with the Fed. Certainly the markets like the Fed's message, although some of the tariff news certainly seem to you know, give the market some comfort here that, that it can make progress on carving out a low,

Jeffrey Roach (02:11):

Right. So a lot of the takeaways for investors after the chair reported to the press which was lively. We'll talk more about that just a little bit on the podcast. But chair Powell did seem to deliver some news that were, that was fairly positive for markets. One thing, you know, it's really important for our listeners to note, you know, energy was a win last week, but I wonder it's a little bit just kind of picking up where it really was such a laggard for so long. So if you're looking at that year to date or one year column, you can see how much of a, of a spread there is, you know, 2.6% there <laugh> on the year relative to what we're seeing in utilities or communication services. So I don't know if I want to read too much into this rally on a heavy cyclical basis because we're certainly heading toward a slowdown. I think most people would agree with me on that, you know, we're, this is not a cyclical play as you think about even what we've, we've seen in February and so far in March where the economy is slowing down. So maybe it's catching up a little bit from last year.

Jeffrey Buchbinder (03:27):

Yeah, that's fair. You know, the big tech names have been hit hardest during this selloff, so it would be logical to expect those sectors to rebound the strongest coming off of the low. And so I think that's what we're seeing today. Certainly a strong day for consumer discretionary, which is the you know, biggest laggard over the last three months. And we're seeing you know, comeback in tech as well. So that's good to see. On the international side, we really didn't see too much divergence from what the U.S. was doing, although you did have Japan and India with, with really strong weeks. We continue to follow what the Bank of Japan is doing. Seems like the comments out of Bank of Japan have been a little bit more hawkish lately, Jeff, but yet the market is, you know, seemingly getting some comfort.

Jeffrey Roach (04:25):

Yeah, they've nipped deflation in the bud most likely, right? We're starting to see these inflation numbers tick up, hence the ability to remove some of this intense accommodation that the Bank of Japan's had for such a long time. So it's a sizable regime shift here when you think about policy in Japan. Another thing probably just to highlight for the last week, at least, a little more correlation between U.S. markets and the German markets. So the pretty noticeable divergence there between German performance and other European countries like France and Italy certainly in Spain. So really Germany was the only one that was down last week relative to some of these other performers. So a lot of numbers to digest on this slide.

Jeffrey Buchbinder (05:16):

Yeah, we talked a little bit about Europe last week and it's just been on such a strong run that we're a little weary of telling folks to jump in and add exposure there. But the LPL research recommended tactical asset allocation is to be neutral developed international. So certainly with that you're going to get a fair amount of Europe as well as some Japan. So still comfortable with that neutral but are watching the international markets certainly more closely now, especially since we've had some dollar weakness. You know, the combination of dollar weakness and U.S. Tech underperformance really helps set up international markets to outperform the question. The hard question is just how long will that go. Turning to the bond market, really strong week for bonds. And so this ties into the Fed, Jeff, the U.S. Aggregate Bond Index up a half a percent.

Jeffrey Buchbinder (06:12):

Pretty similar gains to that across the bond market, whether you're talking about, you know, high quality or credit. So I think it's fair to say that the market took the fed meeting and Powell's communication as dovish. And there you get the, the bond rally we're going mention that word again, transitory, which we thought we wouldn't hear from Powell again after the Fed took so much heat for that calling inflation transitory coming out of the pandemic two, three years ago. But he brought it back <laugh> and so I think that was really a good signal for the bond market. If the Fed thinks tariff inflation is transitory, then they're probably going to continue with their rate cutting path. Is that fair to say, Jeff?

Jeffrey Roach (07:05):

I think it's the right way to think of it really. You think, you know, it's been a little bit tough from the inflation standpoint. Januaries typically run hot anyway. So markets were, I think, overreacting and then as we're here going into the end of Q1, and the key is for investors to have, some patients probably not see some confirmation in inflation slowing down materially until probably May when we get April data. But I think the Fed knows that and is setting the stage for, you know, this, this patient watch, wait and see, try to forecast as much as they can, but very much committed to at least two cuts this year. So that was, that was overall a, a net positive for investors, I think,

Jeffrey Buchbinder (07:58):

Yeah, market expressing confidence that we'll get the two cuts. So you see here, the dollar was up strongly last week. That's probably just a little bit of, let's call it profit taking from dollar short bets. I mean, the dollar went down quite a bit I think three, four percent in a very short period of time. So I wouldn't read too much, too much into that in terms of trade because we still have the same tariff uncertainty. Maybe it's slightly clearer today <laugh> than it was last week, you know, with President Trump hinting at maybe a more narrow reciprocal tariff plan. You know, that's getting people off of the worry about a universal tariff, you know, for example, 10% across the board for everyone. So it, it will be narrow. Market also seems to like the fact that they're going to delay some of the sector tariffs like autos or pharmaceuticals.

Jeffrey Buchbinder (08:58):

At least that's the last report that I saw. And so anytime you get a delay that gets the market thinking, well, maybe we, we won't get those tariffs at all. I don't think that's the right way to read that. But the point I'm making is that the tariff uncertainty is still high. The market probably doesn't have enough clarity to just rally back to all-time highs before April 2nd. I mean, that's a long way away. The move in stocks, not April 2nd. So we'll wait and see what we get from the Trump administration next week, and I think we can go from there. But you know, clearly the dollar bonds and stocks are all going to take direction from the trade situation. So here's the S&P 500 and there's been a lot of technical damage, you know, below the moving averages that we're showing here whether it's the 20, the 50, the 200.

Jeffrey Buchbinder (09:52):

But today's snapback I think gets us back above the 200. And you know, the good news here is that when you're way oversold and then you start bouncing, those bounces can be pretty strong. So that's certainly what we're seeing today, you know, with the S&P 500, up over 1% as we're recording this. When you're deeply oversold and you bounce that tends to be a good signal for a trading buy. So you could see a, you know, a little bit more upside from here in the very short term, but not only do you have this April 2nd date hanging over our heads, but you also have moving averages that are going to provide resistance after they were previously support from a technical perspective. So we've got, got some work to do to get back to the highs.

Jeffrey Buchbinder (10:41):

We think we'll get there this year, but we're not going to get there next week. So I mentioned we broke a four week losing streak. Here's what happens after you do that. So our technical strategist, Adam Turnquist, put this together. So the, I guess the darkest blue bars are what happens after a four week losing streak ends. And so you see here the returns for one, three, six, and 12 months later on average, up 1.2, up 2.9, up 4.6, and up 9.1. Those are good returns we would take them. But if you just break out four week losing streak, when the index, the S&P 500 is below the 200-day or the 40-week, same thing, you end up getting a little bit weaker returns going forward. So on average, one month, three months, six months, 12 months, it's half a point up, one point up, three and a half, and nine.

Jeffrey Buchbinder (11:42):

So it ends up in the same place after 12 months, but a little bit weaker return profile when you do this technical damage, right? Which is what we've done. So this is, I think, a really interesting thing to keep in mind. It's really consistent with our view that we're going to have a bumpy year. It'll be higher, we think, in fact, nine percent's a pretty reasonable return forecast, we think for full year. But probably a bumpy path to get there, especially around trade uncertainty. So let's turn to the Fed more, Jeff. And you did the Weekly Market Commentary, which is available on LPL.com. I think this was the title that you used or something close to it, "Fed Walks the Tightrope." I put a little subheading here, "Return of Transitory," because I just think it's fascinating that he brought that word back, but nonetheless, explain to our listeners what you mean by the Fed walking the tightrope.

Jeffrey Roach (12:41):

Right. Well, I think it's in that next slide. So when you, when you realize that when we last heard from the Fed in terms of their overall projections, it was in their December meeting. So the Fed, as most of our listeners should know, doesn't release projections after every meeting of the Federal Open Market Committee, the FOMC, but periodically throughout the year, they'll compile individual members' forecasts for everything from growth, inflation, unemployment. And because of all those projections are based on individual views, individual model forecasts, they compile all those, they produce what's called a median or a general tendency median forecast. And then, of course, with all those individual forecasts, they create the infamous dot plot. Dot plot is just taking all those inputs and revealing them in terms of time. So this year into 2026, 27, and then the infamous long run expectations in the long run we're all dead as they say.

Jeffrey Roach (13:53):

So what was the tightrope? Was the fact that the Fed and all their individual members on average downgraded their growth forecasts and upgraded their inflation forecast. That's what I'm showing here between the two colors there. December 24 and March 25, as I mentioned, yet at the same time, did not change the median expectations for two cuts in the federal funds rate this year. And that was a little bit of a tightrope. Because typically you'd say, all right, well if growth is slowing, inflation's rising, we're going into a stagflationary environment where you really shouldn't be as aggressive in cutting rates especially if growth is still hovering somewhere around trend, maybe a little bit softer. So that's, that's where the tightrope came in. But here's where I think it turned out to be a somewhat encouraging sign for investors. And as they were listening to the chair talk, a couple things he said, one was the infamous return of the transitory word, meaning tariffs are going to have this one time step up in prices, not necessarily going to be regularly influencing the inflation metrics.

Jeffrey Roach (15:14):

And at the same time though, there's a large level of uncertainty on believing those forecasts. How well are these models doing in predicting, given the fact that we don't know exactly what the trade arrangements will look like? So hence market reactions, the ups and downs in large gyrations and spikes in volatility based on whatever your latest statement from the President is on tariffs. I think one of the things that maybe gives us a little bit of comfort or the ability to say, okay, we can, we can kind of sit and watch and wait, is we're not in an environment where we're seeing, you know, fundamental cracks in the banking system. You know, we're not having a Lehman Brothers moment, for example, those that have been around long enough, thank goodness, the Lehman Brothers references the great financial crisis. So the good news is we have a little bit of, we can bide our time as it were, because there's enough stability in the, in the fundamental economy, particularly from middle and upper income households, and the stability that they're having, particularly from the wealth effect. So there you go. There's the tightrope.

Jeffrey Buchbinder (16:31):

Makes sense. So guiding to stagflation is clearly not a win, but I mean, the market probably expected it to some extent. And you have the transitory nature of tariffs. If the Fed believes that and they reiterated two cuts that was clearance for the market to, to go ahead and rally stocks and bonds. So thanks for that, Jeff. Let's go to the second kind of half of your weekly commentary this week, which is about the tax competitiveness of the U.S relative to many other countries. And some folks might be surprised to see we didn't score very well.

Jeffrey Roach (17:11):

No, no.

Jeffrey Buchbinder (17:12):

Despite the fact that we had tax reform in 2017.

Jeffrey Roach (17:15):

Well, I think one of the things that's, that's helpful to think about as it relates to where the markets are, how investors are trying to understand and process this new Trump administration. I think if you go back to the November timeframe, perhaps when markets were extremely exuberant and you had the Trump bump, you think about four main factors that were part of this platform. You had, you know, tariffs, you have immigration, you have taxes, tax reform or extensions, or made permanency, the tax benefits. And then you had a deregulation. We've been focusing so much on tariffs recently, for obvious reasons, of course. But in my Weekly Market Commentary, what I wanted to say is, well, let's not forget some of the quote unquote mandates that have been talked about. And that might be a little more positive than the headwinds of a tariff. And that's in the tax side of things.

Jeffrey Roach (18:16):

But I wanted to also highlight the fact that, you know, when you think about internationally and you think about the complexity of tax, it's not just all about individual taxes. Now granted, you know, we often talk about that and think about that. But I thought what was interesting, this is from the tax foundation, I thought, well, it's worth highlighting this because this is an opportunity to see if we can make some improvement in the rankings as we compete internationally. We've talked about the trade component. Let's talk about other international metrics. So what this is, Jeff, is it's a ranking based on tax competitiveness. And basically the tax foundation uses five key factors. So corporate, individual consumption tax, think of sales tax, property tax, and then cross border tax rules. So that relates to making money overseas or a type of foreign direct investment.

Jeffrey Roach (19:12):

So based on those five factors brought together in an index, we're number 18. So there's some opportunities for some upside here, I think in a practical way. And I think it's fair to say, well, let's not necessarily try to compete with the Estonia and Latvia's they're doing and structuring their tax codes for very different reasons, trying to, to increase foreign direct investment. We're able to compete, I think in a way to say, oh, let's overtake Canada, let's overtake Germany. Maybe let's look at ways to be a little more competitive on the tax front. We know that that was one of the four factors that the new administration is running on, and maybe that might be offsetting some of the headwinds of tariffs, tailwinds of tax improvements and deregulation. So I wanted to end on a somewhat of a more optimistic note as it were in this week's Weekly Market Commentary.

Jeffrey Buchbinder (20:11):

So Jeff, do you think that the tax reform later this year can help our score? Is that kind of what you're thinking here as you put this together?

Jeffrey Roach (20:20):

Exactly. So of the five, one of them is the individual tax component of the country. And I think some improvements there or just some clarity that the tax cuts could be made permanent and we can actually afford to keep them in <affirmative> permanently could help us rise in those rankings.

Jeffrey Buchbinder (20:42):

Very good. Yeah, I've been talking about the sequencing challenge this year. We're getting tariffs first and we're going to get tax cuts later. So the market is reacting obviously, to the tariffs, now. Not only are tax cuts later, but deregulation is later. That's right. So we, you know, sort of take our medicine first and then, you know, feel better later, I guess, is that might be how this year goes.

Jeffrey Roach (21:06):

Or you could say, eat your spinach first and your dessert after.

Jeffrey Buchbinder (21:10):

There you go. I like that. That's better than being sick and needing medicine <laugh>. Although I think the Trump administration would argue that our trade policy has been you know, making this country a little sicker than it needed to be. I'll leave that debate for another time. So Jeff, this next chart is related to the U.S. dollar. I think what you're trying to say here is that U.S. exceptionalism is not dead. Because The U.S. economy still looks, looks pretty good here relative to the rest of the world.

Jeffrey Roach (21:45):

Right. So if you, yeah, wanted to keep that international theme, like the previous chart there, and you think, look at just real GDP growth year on year. That's the, the far left column. And we're in the, you know, the two and a half range. It's quarter over year based on fourth quarter. So hence December 24. That's why you have the date there. And we had a pretty decent 2024. And at the same time you still see a federal reserve that's on the tighter end of things. So if you go to the far right column, there's our central bank rate and we're at four and a half. We're on the higher end of things. Perhaps that's one of the reasons why the dollar has remained on the stronger side of things. Growth is not bad. Yes, we're slowing.

Jeffrey Roach (22:35):

We don't think that we're going to have a two handle for 2025. We're going to have a one handle on it. But if we're patient enough, we're starting to find, finally see inflation easing up. Latest read is for February. That's why you see, I'm looking at the very bottom row there, February, 2025. The CPI number was two point eight. If you, we wait a little bit by the time we get to May, should be a lot better than that. Hence, the Fed has some opportunities to remain fairly confident that they're going to cut a few times this year despite a slowdown in growth and nagging inflation.

Jeffrey Buchbinder (23:15):

Very good. Next chart is on a topic that I get a lot of questions on, especially when I speak to end clients and it's about mortgage rates. I know this is a target of Scott Bessent, the Treasury secretary and the Trump administration to narrow the spread between mortgage rates and treasuries. And it looks like they're having some success.

Jeffrey Roach (23:41):

Yeah, a couple. Well, first off, just look at that darker line there, Jeff. And you could see that, you know, on, on average the 30 year fixed rate has come way off from those highs where it was above eight percent for a while. So those of us that were able to take advantage of a very low mortgage rate in 2021 this graph looks abysmal. But the improvement there is what I wanted to highlight. You know, we're, we're just north of six and a half as of recording this here on mortgage rates. But I think what was really telling to me was the lighter colored line basically says, okay, pre-pandemic, we were just shy of 200 basis points spread between the 30-year fixed rate and the 10-year Treasury. So about two percentage points we're getting close to that, and that's certainly a good sign getting somewhat some, a little bit more clarity on where we're heading as an economy and seeing rates on both mortgages and the 10-year Treasury kind of easing up a little bit. And I, I don't know, I wouldn't hold my breath for us to get to, you know, two percent spread between the 30-year and the 10-year again, but we're certainly trending in the right direction.

Jeffrey Buchbinder (24:59):

Yeah, good to see. Certainly for those of you building bond portfolios, we do like mortgage-backed securities and we continue to like high quality fixed income, you know, as kind of a buffer against stock market volatility. So this is certainly a tailwind for investors in those kind of portfolios. So high level still, like bonds keep them high quality. So thanks for that, Jeff. Let's turn to the week ahead preview. And I think my theme for the week is consumers, just because of the data points, I mean, this is really what always matters most for the U.S. economy, right? Because we're so consumer dominated, but we've got a number of key consumer data points here. I think the core PCE inflation reading is the headliner.

Jeffrey Roach (25:48):

Yeah, that's right. And that comes at the end of the week, but we'll start out earlier this week, getting an updated look on confidence. One of these reports that I like looking at within the consumer confidence number is plans to make large purchases like a home, a car also plans for consumers to go on vacation, both domestic, international. So it's a lot of that discretionary spending that gets a little bit more color out of this confidence number. Of course, we were a little bit disappointed in more recent confidence numbers suggesting that the consumer is becoming a lot more hesitant. And that certainly is a little bit of  a concern for earnings and business activity. So look for that consumer confidence coming out from the conference board and then durable goods the next day. And then the following day is another consumer related item, and that is the number of folks that either lost a job or are filing for unemployment insurance benefit.

Jeffrey Roach (26:50):

So those that are filing for the first time, they're considered in the initial jobless claims numbers. And then those that have already filed and previous weeks but have not yet found a job, even though they are actively looking. There's a lot of technical jargon to be able to get approved to get those benefits. You have to be actively looking for work. That's in the continuing claims number. So I'm referencing Thursday right next to that star there. But that's been very, very low and stable. Suggesting a tight labor market has certainly been helpful to keep the economy going because people want a job. There's openings, they can get a job and keep earning, earning an income. But end of the week, PCE stands for price consumption expenditures, the price index there, that's the Fed's preferred metric for inflation. Personal consumption expenditures.

Jeffrey Roach (27:44):

By the way, p is personal consumption expenditures. So anything above 0.3 month over month would, would be not good for the markets. 0.3 is consensus. Anything below 0.3 month on month gain for February would be a net positive, but we're seeing a little bit of easing up there. So year on year, the inflation rate according to PCE, a little bit softer than what you see in the CPI numbers. And that's because of the way those two different metrics are constructed. Fed prefers the price index from the personal consumption expenditures, but you see that there on Friday, that's certainly going to be the most important release for the week. And that could be unnerving but it could be you know, a lot better too as well. So I, I think we're going to see a lot more clarity, as I said earlier, when we start moving into April numbers. So we got to be patient as investors and that's certainly one thing that we try to encourage. We are not in the business of, of trading, we're the business of investing long-term investors. So let's be patient. This is for February that we get the February data we get on Friday patient until we get that April May data. And that's certainly going to be a lot better looking than the numbers will get on Friday.

Jeffrey Buchbinder (29:11):

So as the weather warms, the inflation data might Cool. How about that?

Jeffrey Roach (29:16):

<Laugh> There you go. I like that.

Jeffrey Buchbinder (29:18):

Although it's painful to do any sort of weather analogy. Because today here in Boston it's raining pretty much all day. So but yeah, by the time we get, not this upcoming inflation number, but the one after that, I hope and expect the weather to be nice here in Boston. So thanks for that, Jeff. Big consumer week. And certainly big inflation, we probably market as a little bit of a less anxiety around this inflation data because of what we just heard from the Fed, that they think tariff inflation is transitory. So if we do get a little bit of an uptick relating to the tariffs that have already been put in, probably be hard to see that. You're probably going to have to wait a little longer to see it. But if we do see a little bit of it, the market might be a little more forgiving with that, we'll have to see.

Jeffrey Roach (30:10):

Yeah, we might see a little bit, Jeff is interesting, haven't really talked much about this, but the beige book which is the Fed's <affirmative>. Compilation of their conversations with businesses in each of the 12 districts. There were a fair amount of businesses that raised prices in anticipation of tariffs. I thought that was really interesting. So who knows, maybe that was this February data that we'll get on Friday might include some of that. Now granted we're talking, you know, a handful, so maybe it's not enough to materially impact the market, the, the actual numbers, the index there. But I thought that beige book was quite revealing in that sense.

Jeffrey Buchbinder (30:54):

Yeah, no doubt. Tariffs are a big deal and you know, people are that I've been asked several times, you know, should I purchase some big item now or should I wait a year, right? Similar to the question we've gotten for many years. Should I lock in my mortgage right now or should I wait? Right? The equivalent of that is now do I buy a car now or do I buy a dishwasher now? <Laugh>, right? Laundry washer, dryer, things like that. So these are really tough questions to answer <laugh>, but I guess the high level here, as you suggested Jeff, is that in the coming months, the inflation data should get better and that should support Fed rate cuts, should keep the 10-year yield from rising from here. At least that's our anticipation. And that all you know, sets up for maybe comfortable large purchases later this year.

Jeffrey Buchbinder (31:51):

Maybe you don't have to rush out and buy things right now. That's right. Very good. A comforting message to wrap up. So thanks Jeff so much for joining this week and for helping folks understand what we heard from the Fed. It was a little bit confusing I think to some folks, you know, the high level message versus the nuance around you know, reiterating the number of cuts and noting that the tariff inflation, they expected it to be transitory. So as always, thanks to everybody for listening to LPL Market Signals. Greatly appreciate your support and we will be back with you next week. See you then. Take care.