The year kicked off with explosive gains that quickly fizzled as headline-driven concerns about rates, tariffs, recession risks, and valuations shifted market sentiment.
Trump's November victory initially sparked a rally in select sectors, but as policy implications sink in, we're seeing a more nuanced picture emerge—some sectors soaring while others face significant pressure.
Reading the Tea Leaves
We’re in the midst of a US growth scare and momentum/AI trade unwind. 2024 high flyers, look out below.
Check out that multiple compression.
Yikes.
People who went balls long TSLA at 150x next year’s earnings got smoked. Say hello to the new generation of bag holders.
Corrections in QQQ and the S&P, alongside a 22-week streak of downgrades in S&P 500 profit forecasts, underscore a shift from bullish exuberance to a 50/50 recession outlook as US government spending pulls back.
European (e.g. Rheinmetall, BAE Systems, Thales) & Chinese stocks are booming. The EU is pivoting from austerity mode to massive defense outlays and future self-sufficiency—a direct response to Trump's pressure on NATO allies to increase military spending and his "America First" stance on global security.
Last but not least, crypto got taken to the woodshed.
I’ve always found Stocktwits to be a great resource for gauging sentiment—here’s what’s trending as of March 4th:
Stocks are going up. Investors are feeling good. The S&P 500 has now gone up 16 of the last 18 weeks, the longest such streak since 1971.
Cryptos and NFTs are skyrocketing. Price action is starting to feel like 2021 all over again.
Let’s see if we can make sense of all this.
Macro Matters
I’m by no means a macro expert, but macro is clearly driving a lot of market action right now. I found this interview with Warren Pies to be really insightful.
Topics include the labor market, government spending, and potential tariff impacts.
Here’s a quick summary of the convo (s/o NotebookLM):
1×
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-11:41
Let’s shift the focus to rates and The Fed. 10-year Treasury yields and the USD (positively correlated) have been in steady decline to start the year.
Here was the story as of mid-January, per J.P. Morgan:
Yields on 10-year U.S. Treasuries are over 100 basis points higher than their September lows – while the Federal Reserve has been lowering its target policy rate. That’s unusual. In the previous seven cutting cycles by the Federal Reserve going back to the 1980s, the yield on the 10-year Treasury was lower 100% of the time 100 days after the first rate cut.
The Fed is unlikely to raise rates because economic indicators—like wage growth and the labor market—suggest no need for additional tightening. Given that, interest rates might be "priced too high,” meaning bonds could become more attractive as yields fall.
Although unemployment rates are near historic lows, consumers are wildly pessimistic on the jobs market. Expected change in unemployment is the worst since the 2008 recession. Of course, it’s prudent to take survey data with a grain of salt, but IMO this is worth noting.
When we overlay these economic cross-currents with Trump's impending policy shifts—from tariffs to deregulation to tax policy—we get a far more complex market picture than headlines suggest.
This interplay of factors creates a stock picker's market.
Rather than a uniform Trump effect, we're seeing sector and company-specific reactions based on exposure to his likely policies. The European defense boom is partially a response to geopolitical realignment expectations under Trump, while the domestic market digests the implications of America First economics.
Navigating the Market Landscape
Could the market rally to new all-time highs in short order? Maybe.
Could a dead cat bounce set investors up for another flush lower? It’s plausible.
Could we see another washout similar to the COVID panic (can you believe it’s been 5 years)? It’s possible.
Of course, market prices are a manifestation of participants’ collective expectations vs reality, so the most important question is: what’s priced in?
As investors, our job is to identify mispricings and capitalize on them.
I asked my AI assistant, Gemini, to summarize the market narrative given the above information.
The year's initial market euphoria, driven by AI and momentum trades, quickly dissolved into a period of heightened scrutiny as investors grappled with rising interest rates, recession risks, geopolitical tensions, and a long-overdue valuation reset. Multiple compression, earnings downgrades, and market corrections underscored the shift from growth-at-any-price to a demand for tangible results. Global divergence, with Europe and China pursuing distinct stimulus and defense spending policies, adds complexity, while the Fed's unusual rate-cut dynamics and consumer pessimism fuel uncertainty. The market, transitioning from extreme bullishness to caution, now faces the critical question of what risks are truly priced in, demanding a data-driven, flexible approach to navigate the volatile landscape.
Not bad for a zero-shot prompt.
As always, these are my thoughts given the current facts. If and when the facts change, so will my opinion.
The economy is slowing, but I don’t see an imminent recession materializing. Still, my biggest fear is the negative reflexivity that could spiral from here.
The stock market is highly sensitive to uncertainty, and ongoing headline and policy-related risks are likely to drive volatility in the near term. And that volatility will lead to long-term opportunity.
We just have to continue playing the market in front of us, not the market we want to see.
Stuff Worth Your Time
Odd Lots: Goldman's Jared Cohen and George Lee on the Unprecedented Shocks in Geopolitics
Given my long investment horizon and the near impossibility of timing the market, I’m still mostly invested in equities. I started nibbling on a few names from my watchlist and have more capital that I’m looking to put to work on market weakness.
I’ll dig into my watchlist in a future post.
In the meantime, stay calm, touch grass, and remember that there’s always a reason to sell. Best of luck out there.
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Excellent commentary on the fintech world as always Chima. Always look forward to yours posts, this one did not disappoint.