Market Thoughts: What, me worry?

As markets struggle to find their footing, investors are caught in a headline fettered whirlwind. The pace and misdirection of swirling narratives is weighing on sentiment. The match of ‘fear and greed ping-pong’ continues. Your serve. What, me worry? Increasingly, the answer is yes.

The Conference Board’s March consumer confidence reading came in at its lowest level in four years. Expectations for the outlook are at their lowest since 2013. The delta between individuals that believe there’ll be fewer versus more jobs in six months leapt higher. One-year forward inflation expectations rose to 6.2%. Bad karma.

Soft data continues to move in the wrong direction. That said, soft data is just that… “vibey”, to borrow an overused trending word. If sentiment continues to worsen it may eventually affect behavior. Company and consumer action are the inputs to hard data. Today they’re guarded, not overreacting.

I began my money management career in emerging markets (EM) many moons ago. We invested in corporate and sovereign debt, equities and currency markets. George Soros is credited with developing the concept of reflexivity. It was built off an exchange rate overshoot theory by Rudi Dornbusch at MIT. Both argue for the inefficiency inherent in markets, my bread and butter investing.

Emerging markets by nature experience more than their fair share of overreaction. Soros’ reflexivity, not to mention Dornbusch’s overshooting model, seemed designed for EM investing. Certainly back in the day. Reflexivity argues that investors base decisions on their perception of reality. That creates pockets of overshooting, up or down, in prices. Disequilibria.

Reflexivity rhymes with Benjamin Graham’s observation that markets are a voting machine in the short run and a weighing machine in the long run. Like reflexivity, the short term voting machine attempting to redefine reality’s more grounded weighing. Greed is good until it isn’t.

I say all of that because it rhymes with the disconnect we’re seeing between soft and hard data. Soft data reflects perception of future reality. Hard data’s the ‘weighing machine’ part of the market equation. It continues to reflect an economy in late cycle, waning. It’s backward looking.

Exogenous shocks can quickly cause a market sell-off. A correction becomes something worse when a shift in sentiment is sustained. It changes behavior, for better or worse… averting or causing recession. Self-reinforced action redefining price equilibria. Boom to bubble. Bubble to burst. Burst to boom.

Hard data matters. Inflation, employment and earnings importantly. We get first-quarter earnings in a few weeks. If they deliver to the upside, investors can breathe a bit easier. Company calls will be keenly focused on for any hint or insight to capital spending and hiring. We’re not out of the woods yet. I say that as a pragmatist, not alarmist. Emotion has nothing to do with investing.

A large part of the market correction we’ve seen was driven by investors rightfully taking froth off big tech valuations. While those valuations were built on the back of incredibly strong earnings and free cash flow, they’d overshot. The sell-off to date is healthy. That doesn’t make it any less stinging.

I’m optimistic we’ll see higher earnings growth than 8% this year. I’m anchoring on 10% growth. I hope earnings growth in 2026 is 8% or higher. A lot depends on the policy action coming from Washington. The tail risk around earnings is rising.

Where markets go from here will be as much defined by consumer and corporate action as it will inflation and growth expectations. Both up against the ropes. Tariffs are a tax that keeps giving. They add to inflation as they pass through the economy. Then they level off. It remains a tax.

Consumers will continue to feel the bite of permanently higher costs. Prices are already high for consumers. To point out something obvious, inflation measures the rate of change of prices. When you read that tariffs are ‘transitory’ in their impact on inflation, they are… sort of.

Tariffs raise prices. All else equal–it never is–those prices remain high. Less inflation means those prices are rising at a slower pace, not in decline. A slowdown in consumption generally follows. It’s why we keep hearing about stagflation. Rising inflation, stalling growth.

We saw a flash of this in February’s real personal spending data. It came in lower than forecast. January was revised lower as well. The Fed’s favored measure of inflation, the core personal consumption expenditure price index, came in higher than forecast at 2.8% yoy. Neither alarming, both worth noting.

The Fed expects inflation to remain high this year. Growth forecasts have been revised lower. That keeps them on hold for longer than investors expect. The Fed will be watching labor markets and growth for a signal to cut rates. Also inflation, hoping to avoid rate hikes.

With auto tariffs announced, “Liberation Day” is fast approaching. Reciprocal tariffs to follow. They’ll likely beget reciprocity from those targeted. A tit for tat escalation is bad for consumers and corporate margins. Ultimately, for the global economy. We’re not there yet.

Unless explicitly stated otherwise, all data is sourced from Bloomberg, Finance LP, as of 3/28/25.