Premium Stock Market Update CPI Day (Free Member Edition) Wednesday, March 12, 2025
Markets staged a modest rebound today, with the Nasdaq 100 (QQQ) gaining 1.2% and the S&P 500 (SPX) advancing 0.5%. Notable standouts included NVIDIA (NVDA), which has now climbed nearly 10% from recent lows, signaling renewed investor confidence in high-growth tech names.
Away From Stocks: Treasury yields continued their upward trajectory, with the 10-year yield rising to 4.31%, reflecting persistent inflation concerns and shifting Fed expectations. Crude oil prices also edged higher to $68 per barrel, diverging from the recession-driven risk-off sentiment that dominated the past two weeks. Meanwhile, volatility has slightly eased, with the VIX ticking down to 24 as markets digest macroeconomic data.
The Federal Reserve’s case for inflation being under control continues to strengthen, with recent data reinforcing a positive trend. While January and February are typically subject to seasonal distortions, the underlying trajectory remains favorable. One of the biggest inflationary pressures in 2023 and 2024—auto insurance—has significantly cooled. In February, auto insurance costs rose just 0.27% month-over-month, a sharp slowdown from January’s 1.99% increase. This marks a substantial deceleration, indicating that insurers have likely reached premium sufficiency. As a result, the steep price hikes exceeding 20% seen over the past two years are likely behind us. More broadly, 53% of the Core CPI basket’s year-over-year inflation rates have returned to trend, surpassing the 20-year average of 50%. This further supports the view that inflationary pressures are easing. While the Fed remains cautious about potential one-time inflationary effects from tariffs, the overall inflation trend points toward stability.
Small Business Sentiment & Inflation Trends:
The NFIB Small Business Optimism Index for February indicates that only 16% of business owners view inflation as their primary challenge—the lowest level since October 2021. Labor quality concerns have now surpassed inflation as a key issue, reflecting shifting economic pressures.
This sentiment diverges from the University of Michigan Consumer Sentiment Survey, which still highlights elevated inflation expectations, signaling a disconnect between small businesses and broader consumer outlooks.
The February core Consumer Price Index (CPI) is projected to rise by 0.29% month-over-month, down from 0.4%-0.5% in January, suggesting disinflationary momentum.
A refined measure of "true inflation," which tracks price growth based on a basket similar to core CPI, currently stands at 1.35% year-over-year, significantly below broader CPI metrics that factor in imputed inflation.
Market Impact of Tariffs:
Equity and fixed-income markets have responded negatively to escalating tariff tensions, with stocks experiencing steeper drawdowns due to heightened policy uncertainty.
The market downturn is being exacerbated by concerns over potential fiscal tightening ("detox") and echoes of Fed Chair Powell’s 2022 warnings about economic pain associated with policy normalization.
Interestingly, stock indices in several trade-targeted economies have outperformed the U.S. market, suggesting that while the U.S. perceives tariffs as a recessionary risk, foreign markets may see them as negotiation leverage rather than an outright economic threat.
Investor anxiety is compounded by the absence of a perceived "Trump put"—a belief that the government would intervene to support markets. Forced liquidations (margin calls) have intensified the selling pressure, while the White House's non-committal stance on stock market stabilization has fueled uncertainty.
Bond Market Perspective
The bond market is pricing in a “Fed put”, anticipating that the Federal Reserve will step in to cushion economic distress.
Unlike equities, corporate credit markets—especially high-yield bonds—have remained relatively resilient, signaling confidence that the Fed will ease policy if conditions deteriorate.
The probability of a May rate cut has surged, with the market now expecting 3-4 rate cuts this year, outpacing the Fed’s official guidance of 2 cuts. This divergence
underscores investor expectations of a more aggressive monetary response.
Stock Market Outlook:
For equities to experience deeper drawdowns, investors would need to price in a recession probability exceeding 50%, alongside skepticism about Fed intervention.
Historically, during U.S. recessions since 1929, the average peak-to-trough equity drawdown has been roughly 24%. The current 10% correction implies that markets are factoring in a 40% probability of an economic contraction.
Historical Market Context & Rebound Patterns:
The S&P 500 has dropped 10% within 20 trading sessions—a pace historically associated with sharp rebounds.
Past instances of such rapid corrections have been triggered by macro shocks, including the COVID-19 crash, trade wars, and financial crises.
Following similar swift declines, historical data suggests:
One month later: The market was higher 5 out of 6 times
Six months later: The market was higher 6 out of 6 times
Twelve months later: The market was higher 6 out of 6 times
The current market correction is largely attributed to tariff uncertainty, yet historical precedents indicate a strong probability of recovery over the medium term.
Bottom Line:
Our next W.D. Gann Cycle pivot date is set for March 10-11, 2025. However, we must wait for a buy signal from our proprietary algorithm. March 3, 2025, our proprietary algorithm issued a sell alert for the S&P 500 Equal Weight RSP ETF, bringing the total to five indexes on sell alerts. On Monday, February 24, 2025, our proprietary algorithm issued a sell alert for the Russell 2000 IWM ETF on the daily chart, following a similar signal on the weekly chart last Friday, February 21, 2025. We also received a sell alert for the Dow Jones Industrial Average ETF DIA on February 24, 2025. On February 26, 2025, our algorithm issued sell alerts for two major index-tracking ETFs: the S&P 500 ETF (SPY) and the Nasdaq 100 ETF (QQQ), signaling a shift in market momentum. Given current market conditions, we advise against initiating new equity positions until our algorithm confirms a renewed buy signal across major indices.
