“Recession Red Flags: Why the Next Few Months Could Be Turbulent”

“Brace for the Long Haul: A New Economic Saga Is unfolding

KR Opinion

Now that Trump has finalized his cabinet appointments, the political landscape is becoming increasingly complex. He appears to be advancing additional government initiatives to enhance efficiency, which I view optimistically, though with growing concern. My worry is that amid the numerous changes occurring now and anticipated in the coming months, something critical might break beyond repair.

Walmart's recent warnings about tariffs and recession risks align with my own forecast of a potential economic downturn beginning in Q3 this year. The key question remains whether this downturn could extend beyond my initial projections, particularly as 200,000 to 400,000 government jobs disappear, potentially creating significant negative economic repercussions.

While traveling recently, I had an insightful conversation with an executive from a major hospitality company with multiple chains. They shared compelling perspectives on how government travel impacts various industries, especially around Washington DC, but extends nationwide. Government employees constantly travel, utilizing numerous expenditure accounts that could be affected if substantial workforce reductions occur. Though displaced workers may eventually find positions elsewhere in the economy, the current flow of government spending includes considerable waste, as we've observed through various programs.

I've come across unverified information suggesting the discovery of $50 billion in government employee credit card debt. This raises questions about whether the charges were directed to personal or official accounts. This ongoing revelation of waste and corruption will likely continue to influence market sentiment.

We're essentially watching an unfolding movie. We know the beginning but can't predict the middle or conclusion. Significant challenges lie ahead in this economic narrative.

Returning to current market conditions, housing is experiencing increasing pressure lately. Interest rates remain relatively stable with minor upward fluctuations, but builder sentiment and related metrics are deteriorating. Though consensus warnings often prove false, I notice genuine drivers affecting market direction.

Tomorrow's consumer sentiment data and today's real estate figures may not deliver dramatic numbers individually, but they could establish meaningful trends for the future. I maintain my expectation of recession indicators emerging around Q3.

Prepare for a lengthy economic saga with many twists. While the long-term outcome may prove positive, the journey from our current position to the following stages will likely be turbulent and unpredictable. At present, we're not even contemplating what lies further ahead.

Looking back on Thursday's action

Thursday's market activity showed a downward trend following the S&P 500's record high from the previous day. The major indices dropped sharply at the opening, with the S&P 500 falling as much as 1.0% before recovering somewhat to close down 0.4%. This pattern revealed profit-taking and consolidation early on, followed by resilient buying interest as investors viewed dips as buying opportunities.

Market breadth initially favored decliners by a 2-to-1 margin at the NYSE, but this narrowed to a 4-to-3 ratio by the closing bell, reflecting the afternoon recovery. Walmart became the day's biggest disappointment after releasing underwhelming fiscal Q1 and full-year guidance, with its shares tumbling 6.5%. This poor performance made Walmart the worst performer in the Dow Jones Industrial Average and the S&P 500 consumer staples sector, which fell 1.0%.

The consumer discretionary and financial sectors also showed significant weakness, declining 1.1% and 1.6%, respectively. These two sectors represent approximately 25% of the S&P 500's total market capitalization, magnifying their impact on the overall index. Meanwhile, energy emerged as the day's most substantial sector, gaining 1.0% as oil prices climbed to $72.49 per barrel, up 0.6%.

In the bond market, the 10-year Treasury yield decreased by four basis points to 4.50%, while the 2-year yield remained unchanged at 4.27%. Treasury securities showed minimal reaction to disappointing economic data, including higher-than-expected weekly jobless claims and a weaker-than-anticipated Philadelphia Fed Survey for February.

Dow Jones Industrial Average: +3.8% YTD

S&P 500: +4.0% YTD

Nasdaq Composite: +3.4%

S&P Midcap 400: +1.8% YTD

Russell 2000: +1.4% YTD

Reviewing Thursday's economic data:

Weekly Initial Claims 219K (KR Forecast consensus 217K); Prior was revised to 214K from 213K, Weekly Continuing Claims 1.869 mln; Prior was revised to 1.845 mln from 1.850 mln

The key takeaway from the report is that it covers the period in which the household survey for the employment report is conducted. Given the continued low level of initial jobless claims, economists are likely to expect a fairly solid increase in February nonfarm payrolls.

February Philadelphia Fed Index 18.1 (KR Forecast consensus 20.5); Prior 44.3

The key takeaway from the report is that new order activity decreased in January, while the prices paid and prices received indexes both increased.

January Leading Indicators -0.3% (KR Forecast consensus 0.0%); Prior was revised to 0.1% from -0.1%

Looking ahead, Friday's economic lineup includes the flash February S&P Global U.S. Manufacturing PMI and flash February S&P Global U.S. Services PMI readings at 9:45 ET, and the January Existing Home Sales and final February University of Michigan Consumer Sentiment survey at 10:00 ET.

WaveTech Data Base

As we approach the end of the trading week, the WaveTech Database shows interesting developments in the daily models. Currently, the symbols in the database hold 65.90% of long positions, with sectors holding 66.67% and groups holding 52.94%. Today's data reveals significant activity: 111 new entries and 1388 exits for the Daily 1.2a Long model (ratio 0.08, negative sentiment), while the Daily 3.2a Long shows 129 entries against 61 exits (ratio 9.67, bullish sentiment).