It has been quite an emotional two weeks for stock investors. Investors remain troubled by signs of economic weakness, policy chaos in Washington, D.C., including the unknowable impact of tariffs, and generalized uncertainty about where all this is going.
It is always tough to make precise predictions about market tops and bottoms and where the market is headed over the next few days. We need more time to understand how serious any economic weakness is.
But the good news is that we are probably not headed into a recession. Sentiment has turned pretty dark (if not uniformly so), which is a positive in the contrarian sense. Sidelined insiders have begun to step up in a much more serious way in the past two weeks. If I had to guess, I would say more possible stock weakness ahead, but a lot of damage has occurred, so we are probably well into the current bout of weakness.
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Jim Paulsen, who I will respectfully call the great-uncle of this correction since he was the first to call it several weeks ago (aside from the normal array of permabears), sees more signs of economic weakness and more stock market weakness ahead.
In his Paulsen Perspectives on Substack, he cites contractionary forces like higher yields, a strong dollar, weak money supply growth and a slowdown in fiscal stimulus growth. He also makes a good case in a March 10 note that several nuanced measures of employment activity are at levels that normally precede a recession (see below).
No one knows for sure, of course, but he sees more market weakness ahead, which makes sense because he thinks growth will slow to 2%. He thinks the ten-year yield could fall close to 3%. The kind of economic weakness that would get us there would also shake up stock investors. He is not yet forecasting a recession, which would cause a bear market.
“Labor market indicators have become more concerning lately,” Paulsen writes on March 10. “Although this does not guarantee a recession anytime soon, it does suggest recession ‘fears’ among investors will likely continue intensifying and remain problematic for the stock market.”
Troubling economic signals that normally precede recessions include: Weak job growth; a level of greater layoffs which normally precedes rising credit spreads (which raise recession fears); a decline in the employment to population ratio which normally precedes corporate EPS weakening; and a growing lack of investment that would enrich the labor force and boost productivity. He also cites a persistently higher U6 underemployment rate. U6 means unemployment that includes people who are unemployed, marginally attached to the labor force, and part-time workers. “These worries may keep the stock market turbulent until greater economic policy support is forthcoming,” he says.
A More Bullish Take
Ed Yardeni of Yardeni Research remains fairly bullish on growth. He recently raised his subjective odds of a recession this year to 35% from 20%. But he is still betting on the resilience of the economy.
As for negatives, he points out that President Trump’s tariff policies are creating a retaliatory trade war rather than negotiated settlements. More “reciprocal” tariffs will be imposed on April 2. Trump wants to raise revenues with tariffs, which implies some tariffs will be permanent.
On the bright side, he suspects that a fair amount of recent labor market and consumer spending softening was due to severe cold weather in January. While many people are now concerned that the Atlanta Fed GDPNow Q1 forecast has slipped into contraction, Yardeni Research economist Eric Wallerstein notes that the steep drop was caused in part by large gold imports, which is probably a one-off event. Imports detract from GDP estimates, given the way GDP is calculated.
Sentiment
Standard sentiment measures like the Investor Intelligence Bull Bear ratio and the American Association of Individual Investors survey have turned significantly darker. They are flashing buy signals. However, cash levels at investment funds recently remained low, and sell-side strategists were recently quite positive, suggesting too much bullishness, according to a recent Bank of America Survey. In my view, the sentiment signal is mixed but modestly bullish.
Insiders
After staying sidelined for the past several months, actual insiders (not institutional owners who report because of large position size) have stepped up to buy in the past two weeks. Notably, there have been many $1 million-plus purchases, which is unusual and certainly a change for corporate executives and board members. Insiders with good records who are buying in size ($100K or more) are most interested in cyclical areas like energy, tech, banking, and industrials. This suggests they don’t see a recession coming. They are also showing an interest in biotech, which has been especially weak.
The bottom line: There’s a case for more selling ahead, but some bullish signals are starting to emerge, chiefly, increasingly negative sentiment (positive as a contrarian signal) and the pick-up in insider buying.
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