Week of Mar 09 2025

The administration's economic strategy and escalating trade tensions have heightened market uncertainty. A "Phase Shift" strategy theory suggests an intentionally engineered recession to enable future rate cuts, tax reductions, and deregulation - supported by Treasury Secretary Bessent's comments about a coming "detox period." Trade tensions have intensified with new tariffs - 25% on Canada/Mexico and 20% on China - triggering retaliatory measures. These developments led Yardeni to increase recession probability to 35%, while Bessent's "Fortress North America" concept points to a fundamental realignment of North American trade relations. Market intervention, if any, would likely come at significantly lower levels.

The technical picture has markedly deteriorated. The Nasdaq 100 has broken below its 200-day moving average for the first time since March 2023, ending a 497-day streak—the second-longest in history. Historical analysis suggests the next two weeks are critical, with declines exceeding 3.5% from this point typically leading to bear markets, while smaller declines tend to resolve positively. Key S&P 500 pivot levels to monitor are 6031 (short-term), 5897 (medium-term), and 5418 (long-term), with additional technical support at 5720 (200-day moving average), 5665 (23% retracement), and 5500 (trendline support).

Market positioning data shows contrasting signals. JPMorgan's Tactical Positioning Monitor indicates increased fragility with a 4-week change at -1.45z and aggregate positioning at the 32nd percentile (down from +0.5z in January). While bearish sentiment has reached 2022-level extremes, creating potential contrarian opportunities, systematic selling continues with volatility-targeting strategies having reduced exposure by $15.5 billion. McElligott suggests the mechanical de-allocation has removed crash-risk accelerants. Meanwhile, a notable shift toward European equities is underway, with four consecutive weeks of inflows (latest exceeding $4 billion), though Friday's European weakness (DAX -1.7%) has raised contagion concerns. As BofA's Hartnett notes, recent inflows represent just 4% of wartime outflows, suggesting significant potential for continued reallocation.

Corporate fundamentals provide the most compelling counterpoint to the bearish narrative. Q4 2024 earnings showed remarkable strength with S&P 500 companies delivering 17.0% blended earnings growth year-over-year, significantly above expectations. Financials (+35.1%), Communication Services (+31.5%), and Consumer Discretionary (+27.2%) have led earnings growth, with Energy the only sector showing negative earnings growth (-29.1%). This corporate resilience helps explain why markets haven't fallen more dramatically despite systematic selling and growth concerns.

The left-tail risks center on accelerating systematic deleveraging triggering wider liquidity strains, pushing markets toward deeper support zones, especially if employment continues weakening alongside persistent inflation pressures. Additional concerns include the potential for unanchored inflation expectations, evidenced by the University of Michigan's 5-10 year inflation expectations measure rising to its highest level since 1995, which could constrain the Fed's ability to respond to economic weakness. Right-tail scenarios involve stabilization in economic data accompanied by disinflation that enables the Fed to begin cutting rates, potentially triggering a market rebound as systematic strategies reverse from selling to buying.

Looking ahead to Week 11, several key catalysts could further shape market direction. Wednesday's US CPI release for February stands as the most significant data point, potentially affecting Fed rate cut expectations that have dramatically increased to over 2.5 cuts by year-end. Tuesday brings the NFIB small business optimism report and JOLTS job openings, which will provide insights into business conditions and labor market dynamics. The Bank of Canada's policy decision on Wednesday and ECB President Lagarde's speech at Frankfurt's "The ECB and Its Watchers" conference will offer international monetary policy perspectives. Friday brings Chinese money supply and credit growth data alongside the preliminary March Michigan consumer sentiment survey. Major technology earnings from Oracle (Monday) and Adobe (Wednesday) could influence sentiment in the recently volatile tech sector.