Don’t Expect Market Volatility to Go Away Anytime Soon
Why investors will be hanging on Powell's Friday comments
Market Recap
There used to be some debate and maybe still is in some purely academic circles about just how efficient the markets are. Judging from equity markets’ reaction to the news in each of the first few days of this week, we think things are just about as efficient as they could be. Wednesday saw all US broad equity indexes grind higher throughout the day, closing at or near session highs across the board. They didn’t reclaim all of the lost ground from the previous two sessions, but they did make a dent in clawing some of those losses back. The S&P 500 rose 1.12%, the Dow gained 1.14%, the Nasdaq Composite added 1.46% and the Russell 2000 closed 1.02% higher. Sector leadership came from Materials (2.61%) as Trump seemed to soften his stance on some, but not all tariffs. Energy (-1.46%) lagged as the combination of continued oversupply and demand-reducing tariffs pushed prices lower. The remaining sector results ranged from 1.58%(Industrials) to -0.70%(Utilities).
After giving back all their gains after Sunday’s US Strategic Cryptocurrency Reserve announcement, Wednesday saw Bitcoin (BTC) and Ether (ETH) both rise just over 4%, with BTC crossing $91,000 and ETH breaking above $2,250. Volatility as measured by the Cboe Market Volatility Index (VIX) edged lower to a still above average 21.93 and gold picked up $5.00 to $2,924/oz. The 10-year treasury saw prices soften slightly, bumping the on-the-run (most recently issued) yield to 4.31%.
The Tematica Select Model Suite saw positive results across the board except of course for Market Hedge. Digital Infrastructure also eased lower as Credo Technology Group (CRDO) fell almost 14% despite turning in earnings that beat Q3 expectations and guidance. Similar to the reaction to recent Nvidia (NVDA) earnings, it seems like the market just wanted more from the company. With the specter of tariffs easing (once again) we saw EV Transition, Space Economy, and Rebuilding America top the leaderboard. The only thing is that while Trump is ready to come to the table to negotiate, tariff target countries don’t seem to be as enthusiastic. Ultimately, time will tell but we will be among the many keeping track of these policy changes until everyone figures out what the latest “new normal” is.
Don’t Expect Market Volatility to Go Away Anytime Soon
Well, with equity futures pointing to a potentially rough market open later this morning, it looks like yesterday’s market rebound will lack follow-through. In other words, market volatility remains in play even though President Trump announced a partial rollback of tariffs against Canada and Mexico yesterday.
Comparing the jobs data in ISM’s Manufacturing and Service PMI reports for February with yesterday’s disappointing February Employment Change report from ADP (ADP) sets the stage for tomorrow’s February Employment Report. Despite that cloudy picture and the initial impact of DOGE-related cost reductions, the market consensus still sees job creation picking up the gap in February to the tune of 160,000 non-farm jobs, up from January’s 143,000. Our thought is there is ample room for the market to be disappointed.
In the twisted logic that Wall Street is known for, such bad news would be viewed favorably as the thinking goes, the rollover in job creation could prompt the Fed into action. That rationale helps explain the CME FedWatch Tool showing three 25-basis point rate cuts for this year. However, when we look at the price component data tucked inside ISM’s February Manufacturing and PMI reports, it jumped to its highest levels in the last several months. This combination should make for some very interesting comments from Fed Chair Powell on Friday. And yes, the market will more than likely be hanging on those comments and what they mean for rate cut expectations.
With inflation already perking up and more to come from expected tariffs, it’s hard to see Powell backing that market’s monetary policy outlook. That along with any new developments in Washington are reasons why market volatility is likely to persist at least through the end of the week.
We are reading that Walmart (WMT) is reportedly asking Chinese firms for major price cuts to shift the burden of Trump tariffs, our view is margins will be a key topic when we shift into the March quarter earnings season and companies serve up their June quarter guidance. We’re already seeing signs margins are poised to get squeezed. S&P Global’s (SPGI) final February Service PMI report out yesterday found “Cost inflation also picked up in February as suppliers raised prices, although competitive pressures meant that service providers increased their own charges only modestly.”
We’ve already seen multiple retailers from Ross Stores (ROST) to Foot Locker (FL) and Victoria’s Secret (VSCO)deliver guidance that fell short of market expectations. But with reciprocal Trump tariffs targeted for April 2 as well as others for copper and aluminum expected the odds of seeing more of this across a wider array of sectors is rising. The question we’re pondering is to what degree are companies aiming to get ahead with price increases ahead of these telegraphed tariffs?
That should make for some interesting earnings call conversation when Macy’s (M), Costco (COST), and Gap (GPS) report today, and Dick’s Sporting Goods (DKS), Kohl’s (KSS), American Eagle (AEO), and Williams Sonoma (WSM) do the same next week.
We’ll also be tracking quarterly results out tonight from Broadcom (AVGO) and what it has to say about connected devices, cybersecurity, and AI/data center demand. These comments will play directly, and indirectly, to the outlook for our Digital Lifestyle, Cybersecurity, Artificial Intelligence , and Digital Infrastructure models.
The Tematica Model Suite
The Strategies Behind Our Thematic Models
Aging of the Population - Capturing the demographic wave of the aging population and the changing demands it brings with it.
Artificial Intelligence – Software, chips, and related companies that facilitate the collection and analysis of large data sets and autonomous generation of solutions given non-machine language prompts.
Cash Strapped Consumers - Companies poised to benefit as consumers stretch the disposable spending dollars they do have.
CHIPs Act – Capturing the reshoring of the US semiconductor industry and the $52.7 billion poised to be spent on semiconductor manufacturing.
Cloud Computing – Companies that provide hardware and services that enhance the cloud computing experience for users, such as co-location, security, and edge computing.
Core Holdings – Companies that reflect economic activity and are large enough to not get pushed around by day-to-day market trends. Low-beta, large-cap names able to better withstand economic turmoil.
Cybersecurity - Companies that focus on protecting against the penetration of digital networks and the theft, ransom, corruption, or destruction of data.
Digital Infrastructure & Connectivity - Companies that are integral to the development and the buildout of the infrastructure that supports our increasingly connected world.
Digital Lifestyle - The companies behind our increasingly connected lives.
Data Privacy & Digital Identity - Companies providing the tools and services that verify authorized users and safeguard personal data privacy.
EPS Diplomats - Profitable large capitalization companies proven to produce above-average EPS growth and provide investors with the benefit of multiple expansion.
EV Transition - Capturing the transition to EVs and related infrastructure from combustion engine vehicles.
Guilty Pleasure – Companies that produce/provide food and drink products that consumers tend to enjoy regardless of the economic environment and potential long-term health hazards associated with excessive consumption.
Homebuilding & Materials – Ranging from homebuilders to key building product companies that serve the housing market, this model looks to capture the rising demand for housing, one that should benefit as the Fed returns monetary policy to more normalized levels.
Market Hedge Model – This basket of daily reset swap-based broad market inverse ETFs protects in the face of market pullbacks, overbought market technicals, and other drivers of market volatility.
Nuclear Energy & Uranium – Companies that either build and maintain nuclear power plants or are involved in the production of uranium.
Luxury Buying Boom - Tapping into aspirational buying and affluent buyers amid rising global wealth.
Rebuilding America - Turning the focused spending on rebuilding US infrastructure into revenue and profits.
Safety & Security – Targeted exposure to companies that provide goods and services primarily to the Defense and security sectors of the economy.
Space Economy – Companies that focus on the launch and operation of satellite networks.
The Strategies Behind Our Dividend Income Models
Monthly Dividend Model – Pretty much what the name indicates – this model invests in companies that pay monthly dividends to shareholders.
ETF Dividend Model – High-yielding ETFs that provide a range of exposures from domestic equities, international equities, emerging market equities, MLPS, and REITs.
ETF Enhanced Dividend Model – A group of high-yielding ETFs that utilize options to enhance yield through collecting option income.
Don’t be a stranger
Thanks for reading and if you have a suggestion for an article or book we should read, or a stream we should catch, email us at info@tematicaresearch.com. The same email works if you want to know more about our thematic and targeted exposure models listed above.