March Madness is here. March Madness is often associated with the NCAA Men’s Basketball tournament. This year, March Madness can also be associated with volatile markets and mixed economic data. Earlier this month, we chronicled the financial market ups and downs through February, which accelerated into March. This week, we’ll peek into the fundamentals driving such financial market turbulence.
Trump’s on-again, off-again tariff talk has left investors leery of the ultimate impact. Trump granted Mexico and Canada tariff exemptions until April 2. Similar to Trump’s first term, tariffs have become a cudgel for his foreign diplomacy. The eventual tariff application may be extensive or targeted. Beyond Mexico and Canada, similar tariffs are being threatened broadly but could be applied in a pointed fashion. China’s retaliatory tariff increases are much lower in scope than what the U.S. has imposed, while the actions against U.S. companies avoid taking aim at major firms. The on-again, off-again uncertainty has given investors reason for a pause. Recall uncertainty of any kind is the market’s kryptonite.
Labor markets continue to garner attention. The recent government layoffs may coincide with early signs of corporate employment softness. Yes, official government agency numbers indicate millions of job openings, minimal turnover, and low unemployment. On the flip side, unofficial private firm reporting is noting a slowdown in hiring1 and layoffs reaching beyond government job cuts2. A middling labor market has the potential to weigh on consumer spending. If a person is afraid of losing income due to a lack of job security, they will likely opt for hoarding cash instead of spending dollars. In the end, economic activity is simply exchanging money for goods and services. Reduced monetary exchange means an abridged economy.
Productivity, or output per worker, in the U.S., has shown positive signs as of late. 2023 and 2024 productivity increases may be the early implementation of Artificial Intelligence (AI) initiatives, which have the added benefit of holding down labor costs and subsequent inflation. Other economic positives include a precipitous rise in building permits and housing starts, suggesting downstream industries such as home furnishing, moving services, and financial services may be something to look forward to.
Hard-data consumer spending numbers suggest that Americans continue to spend without reservation. Yet, soft-data surveys including sentiment and confidence measures indicate consumers may be getting tired of the free-spirited spending.
Stress fractures seem to be appearing in the immutable veneer. Said another way, the superficial frothiness may be settling down. No matter how one sees the current environment, it is clear change is upon us. Financial markets tend to be forward-looking and become wobbly as haziness clouds forward expectations leading to the normal market reaction we have been witnessing. Such volatility is not different from the historical record.
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